Why 2U, Inc. Stock Dropped 15.9% in September

FAN Editor

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.

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.

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