2U Finds Some Street Support Despite 25% Sell-Off - 2U (NASDAQ:TWOU)

Education technology company 2U Inc TWOU reported a first-quarter earnings and sales beat Tuesday alongside a 2019 outlook that contributed to a sell off in the stock. Two Street analysts stuck with bullish stances on the stock, while a third issued a downgrade.

The Analysts

Oppenheimer's Brian Schwartz maintained an Outperform rating on 2U with a price target lowered from $83 to $67.

BMO Capital Markets' Jeffrey Silber maintained at Outperform with a price target lowered from $83 to $60.

Credit Suisse's Brad Zelnick downgraded 2U from Outperform to Neutral and lowered the price target from $85 to $55.

Oppenheimer: The Good And Bad

2U's earnings report was "decent" as total revenue, adjusted EBITDA loss, and PF EPS all came in better than expected, Schwartz said in a Wednesday note. On the other hand, the company's guidance for the three metrics in the second quarter fell short of consensus estimates.

Beyond the second quarter, 2U's 2019 revenue guidance is short of expectations, in contrast to the company's reputation of guiding revenue growth ahead of consensus estimates, the analyst said.

Adjusted EBITDA and PF EPS guidance for the full year were slightly better than expected, Schwartz said.

The analyst named five reasons for a positive outlook on 2U:

The acquisition of Trilogy Education.
Alternative credential revenue growth showed an acceleration in growth in the quarter.
2U's 2019 profit goals were lifted higher despite a lower revenue outlook.
Newer DGP programs are seeing stable enrollment trends.
The long-term cohort EBITDA margin remains above 42 percent.

Credit Suisse Turns Neutral

Admissions selectivity will likely be a "longer-term issue" for 2U as schools balance on-campus and online interests, Zelnick said in the Wednesday downgrade note.

Credit Suisse continues to believe in the company's long-term mission and views the recent Trilogy acquisition as helpful to diversifying the company's mix, but the admissions uncertainty triggered Wednesday's downgrade, the analyst said.

BMO: Reset Expectations

2U's revenue outlook was lowered for what could be the first time as a public company, as graduate enrollment growth slows, Silber said in a Wednesday note.

Some of the factors contributing to the slower growth include greater selectivity from universities; fewer mid-funnel application reviews; and the postponement of the UC Davis Online MBA, the analyst said.

The company didn't offer an outlook beyond 2019, and BMO said it's now using the company's 25-percent growth rate for the graduate program as a base case moving forward.

This compares to a prior assumption that segment growth would slow to less than 30 percent beginning in 2020.

While a 25-percent growth rate in the graduate program segment is still above the mid-teens industry average, investors who expected top-line growth are likely to be disappointed, Silber said. A reset in expectations is "preferable to future disappointments," he said.

Price Action

2U shares were down 23.52 percent at $45.84 at the time of publication Wednesday.

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