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2U: Growth For Free

Jun. 02, 2020 5:41 PM ET2U, Inc. (TWOU)8 Comments


  • 2U is losing money due to high marketing cost.
  • Assuming more normal levels of S&M spend in a steady state, the stock appears undervalued.
  • Investors interested in the Edtech space are essentially getting future growth for free, with a company that has an impressive track record and a leadership position in the OPM space.

2U, Inc. (NASDAQ:TWOU) is a $2.3 billion market cap global (however primarily US-based) Edtech company. The company had for a relatively long-time a nice growth story attached to it, where growth has come both from the organic side (driven by heavy S&M spend) and growth through M&A.

As shown below, the stock was on fire during 2017 and half-way through 2018. But questions around ramp-up in profitability put heavy pressure on this equity. The recent upturn is, in my view, linked to increased interest in everything Coronavirus resistant and the fact that the company put up a decent Q1 2020 result.

Source: Seeking Alpha

There have been several articles on Seeking Alpha covering from different viewpoints TWOU's merits or faults. In this article, I will briefly present the current bull and bear case and then put forth a more neutral value case (although more on the bullish side) and why the stock is an attractive play if an investor is seeking exposure to the Edtech space.

Bear case

  1. TWOU provides relatively advanced graduate degree programs, which target white-collars and not necessarily the blue-collar workers hit hardest by the Coronavirus. Hence, when significant parts of the unemployed seek further education, these enrollments will not necessarily push up demand for TWOU programs, i.e. unfavorable product mix.
  2. The company was an early entrant into the space of online college education (the company started providing educational services in partnership with USC during 2009) and when colleges and universities develop their own offerings from scratch they will not need TWOU to act as a middleman. Furthermore, the universities will have a better bargaining position and demand a larger share of the total price paid by the consumer (student).
  3. During 2019 the company made a large acquisition. Due to this, the company took on debt. The net cash

This article was written by

Investing in stocks and options for fat F.I.R.E.Value investing (all investing is value investing...) multi-sector approach, buy anything where I have an edge.

Analyst’s Disclosure: I am/we are long TWOU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (8)

I think a totally different company that competes broadly with 2U Inc. and that is also benefiting from the current pandemic and stay-at-home orders globally... is a U.S. microcap company that is currently unnoticed and has, in my opinion, grander potential: Sonic Foundry, Inc. (SOFO: $37 million equity mkt cap).

As I've begun sharing elsewhere, I believe it has a high probability of up-listing back to NASDAQ in the coming quarters. It last traded on NASDAQ on 12/28/18 but then it voluntarily moved to the OTC Market after non-cash impairment charges at the time lowered its shareholders’ equity to less than NASDAQ’s minimum $2.5 million level.

After considerable research and going through public filings, if anyone cares… Below is more background on Sonic (which also announced just a week ago its deeper integration with Zoom Video):

Founded in 1991 and based in Madison, Wisconsin, Sonic Foundry (OTC Pink Sheets: SOFO) is a tech company that offers video capture, management and streaming solutions for higher education (>2/3 of its total revenue; and +1,700 colleges & universities globally as clients), business and government entities. With just over $35 million revenue, ~200 employees and its stock trading at $4.65/share, it has an equity market cap of ~$37 million – or an Enterprise Value of ~$31 million due to cash exceeding its pro forma ~$1 million debt balance. However, I think that it should be valued at much more than that once their 3Q20 (ends next week, 6/30/20) is released in mid-August and reveals, in my estimation, that so many more educational institutions globally are now using Sonic’s technology solutions due to the various stay-at-home orders throughout the world. And among other noteworthy items is:

First, its controlling shareholder (Mark Burish owns 42% after a recent conversion; and his son owns another ~14%) converted just last month (5/13/20) at $5.00/share his $5.6 million SECURED note (at 12.4% effective interest!) into common stock! This should be viewed as a huge vote of confidence by a controlling shareholder who is also a well regarded local businessman and lawyer with his own business law practice.

Second, I think people are not appreciating the fact that now that that $5.6 million debt has been converted into equity AND given that Sonic received on 4/21/20 $2.3 million of Paycheck Protection Program (PPP) loan funds that will eventually turn into a grant and thus equity likely this current quarter… Sonic’s pro forma shareholder equity position sometime this year will likely exceed $2.5 million – and that should be all that Sonic needs to then be able to relist back onto NASDAQ!

Third, despite its pink sheet-listed status, Sonic remains highly transparent and is current with all its SEC filings which are timely, thorough and informative. (This can be confirmed on SEC’s EDGAR.) In fact, Sonic still even holds earnings calls. And after multiple retirements, Sonic now has a relatively new CEO as of last May and a new CFO as of this month.

I uncovered even more interesting items on Sonic but I wanted to at least share the above highlights for now. I’ll also point out that I do own Sonic’s common stock which I purchased after my uncovering of the above information and my subsequent analyses.

Any others' thoughts on Sonic Foundry would be welcomed. Thanks.
The Private Island Saver profile picture
Thanks for the comment, please do a write-up (SA article) of the company including a review of historical financials and I will have a look. BR
nice analysis
Asymmetric Upside profile picture
Thank you for your article. I am in academia and recently sold my position for a short term profit. Seeing how many colleges leveraged Canvas (Instructure) and Zoom on their own to go online, I lost faith in the bull case.

2U also does not make education more affordable. Whoever hopes to disrupt education has to address the issue of money. 2U does provide interest free loans and deferred loans, though.

I have friends who went through their bootcamps, but there seems to be a lot of competition and mixed online reviews for those. 

Despite all that, I still agree that Ivy partnerships represent a wide moat.
The Private Island Saver profile picture
Thanks for the comment, do you see a broad shift of colleges using Zoom in future course offerings or is it more anecdotal evidence during the Corona pandemic?
Asymmetric Upside profile picture
The switch online will be permanent for many courses, including large lectures. 2U does not compete with Zoom though, they also use it.

This pandemic was not a hiatus for academia, it’s an accelerant. And once faculties have been trained with specific tools (Canvas, Zoom etc.) they are reluctant to try new operating systems.
Higher Education Inquirer profile picture
Check out this CM report on brand name bootcamps. collegemeltdown.blogspot.com/...
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