What happened
Shares of 2U Inc. (NASDAQ: TWOU) fell 15.9% in September, according to data from S&P Global Market Intelligence, following an analyst’s note of caution on the online education platform specialist.
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More specifically — and after rallying 30% through the first eight months of 2018 — shares drifted lower after Piper Jaffray analyst Peter Appert initiated coverage on 2U early last month with a “neutral” rating a and $94-per-share price target.
So what
According to a note to clients that TheFly obtained, Appert admitted that while 2U enjoys a “large market opportunity and robust near-term revenue momentum,” he was less enthused for the stock’s “rich” valuation.” In addition, TheFly said he cited “limited visibility into the timing of a turn to positive free cash flow,” and so suggested that investors wait for a pullback before buying shares.
Now what
Investors should know that 2U consciously shuns bottom-line profitability to accelerate its domestic graduate program launches and drive top-line growth. As I discussed with 2U co-founder and CEO Chip Paucek shortly after the IPO in 2014, the company incurs the bulk of the cost structure for setting up those long-term programs in exchange for the bulk of tuition revenue.
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What’s more, as Appert alluded to in his note, 2U plans to more than double its current base to over 100 DGPs by 2021, but it still has a long way to go before it reaches its longer-term target of 250. And that’s not to mention incremental growth from international programs and non-degree short courses down the road.
So with shares now sitting below $67 apiece after continuing to decline in early October, I think long-term investors would do well to open or add to their positions in 2U today.
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Steve Symington has no position in any of the stocks mentioned. The Motley Fool recommends 2U. The Motley Fool has a disclosure policy.
