The Market Is Overlooking 2U's New Contract Extension, Research Firm Says

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  • Shares of 2U Inc TWOU have declined 40.25 percent over the past three months, touching a low of $20.30 on November 3.
  • Compass Point’s Michael Tarkan has reiterated a Buy rating and price target of $40 on the company.
  • Despite the recent underperformance of the stock, Tarkan believes that 2U’s fundamental story remains intact, with accelerating growth and profitability, and strengthening diversification and competitive positioning.

Analyst Michael Tarkan mentioned that 2U had announced an extension to the USC Social Work program on November 9. This renewal takes the term of the program to 2030, while “substantially reducing exclusivity.”

According to the Compass Point report, this is the company’s largest program, with more than 2,000 students enrolled for it.

“In exchange, TWOU will provide USC with fixed and contingent payments over a 24-48 month period and a reduction in TWOU's revenue share to be phased in over time. In aggregate, the consideration will represent a "low single-digit" effective reduction to the current revenue share,” the report said.
The company has also completed the restructuring of seven of its first eight programs, in order to meaningfully reduce exclusivity, gain marketing rights and materially extend the length of the contract. The USC MS in Nursing program has also been extended to 2030.

“We estimate TWOU will generate $66M of revenue from USC during 2015 attributable to the Social Work and Teaching programs,” Tarkan explained, while estimating that the Social Work program would contribute 75 percent of the total revenue estimate.

Tarkan believes that the overall annual revenue that the company has sacrificed for the renewal is only about $2 million, while expecting the company to be able to double its existing USC Social Work revenue base.

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Posted In: Analyst ColorLong IdeasReiterationAnalyst RatingsTrading IdeasCompass Point Research & Trading LLCMichael Tarkan
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