Everything's online nowadays, even all university courses! And $TWOU is helping the best educational institutions be tech savvy and online.
So what did we learn about 2U?
Key Stats
| Ticker | TWOU |
|---|---|
| Sector | Other IT Services & Consulting |
| Latest price | $59.32 |
| Value | $3,051M |
| Daily vol | $22M |
| Date | 17 October 2017 |
| Financials | SEC Financials |
| Website | 2u.com |
1. What's 2U do?
2U, Inc. is a provider of an integrated solution consisting of cloud-based software-as-a-service (SaaS) combined with technology-enabled services (together, the Platform) that allows colleges and universities to deliver online degree programs.
The Company's SaaS technology consists of a learning environment (Online Campus), which acts as the hub for all student and faculty academic and social interaction, and a suite of integrated applications, which the Company uses to launch, operate and support the Company's clients' programs.
Northwestern, Yale, Berkeley, Georgetown, Vanderbilt, etc etc. There are a lot of impressive brands in their network!
2. Looking thro' the numbers
So for as long as I've seen, the business has been growing nicely, but losing money. In fact, I'm delighted to see that Wall Street expects the sales to acelerate, but it doesn't feel like it's on the way to the moon.
| Metric | 2012A | 2013A | 2014A | 2015A | 2016A | 2017E | 2018E |
|---|---|---|---|---|---|---|---|
| Revenue | $56m | $83m | $110m | $150m | $206m | $285m | $390m |
| EPS | $-3.33 | $-3.81 | $-0.91 | $-0.63 | $-0.44 | $-0.12 | $-0.07 |
And if I look at the bottom line, the management team is delighted to talk about EBITDA, banker speak for operational cashflow... but if you look at that, you'll miss that they capitalized technology and content development costs. i.e. they don't put some of their cash costs through the P&L, including salaries. :(
What's the background?
Best I copy the language from the 10-K
We develop content on a course-by-course basis in conjunction with the faculty for each client program. The clients and their faculty generally provide course outlines in the form of the curriculum, required textbooks, case studies and other reading materials, as well as presentations that are typically used in the on-campus setting. We are then responsible for, and incur all of the expenses related to, the conversion of the materials provided by each client into a format suitable for delivery through our cloud-based technology.
And they say the useful life of these courses is circa 5 years. What? University courses will only be updated every 5 years? I'd have thought they require constant updating.
Any cash or dividends?
Yes, there's a cash balance, $22M at the end of the last quarter, that is the equivalent of 1% of the market value. Though a recent share sale will have swelled their coffers. And no, there is no sign of a dividend.
3. Any competition
They highlight two competitors, both of which got bought by some of the sector's behemoths.
Several competitors provide solutions that compete with some of the capabilities of our solutions. Two such competitors, EmbanetCompass and Deltak, were acquired in 2012 by Pearson and John Wiley & Sons, respectively, both of which are large education and publishing companies. There are also several private companies, including HotChalk and Everspring Partners, providing some or all of the services we provide, and these companies may choose to pursue some of the institutions we target. In addition, nonprofit colleges and universities may elect to continue using or develop their own online learning solutions in-house.
Net net, it's hard to find a good peer list. So I'm adding the publishers and the colleges to the roll.
| Companies | Latest Sales | Operating Profit | Return on Equity |
|---|---|---|---|
| 2U Inc | $239M | -5% | -13% |
| Publishers | |||
| John Wiley & Sons Inc | $1,726M | 20% | 9% |
| Pearson PLC (ADR) | $6,270M | 12% | -41% |
| Houghton Mifflin Harcourt Co | $1,390M | 12% | -31% |
| K12 Inc. | $889M | 10% | 0% |
| Colleges | |||
| American Public Education, Inc. | $300M | 19% | 6% |
| Capella Education Company | $439M | 20% | 20% |
| Adtalem Global Education Inc | $1,810M | 20% | 8% |
| Bridgepoint Education Inc | $510M | 6% | -3% |
| Career Education Corp. | $631M | -3% | -6% |
| Grand Canyon Education Inc | $922M | 34% | 22% |
| Strayer Education Inc | $449M | 17% | 19% |
| Laureate Education Inc | $4,239M | 15% | N/A |
So when I get to valuation, I find myself struggling. How can this business have the same market cap as JWiley, more than K12 & HMH together, or half the value of Pearson.
It's even worth more than what Appollo paid to take McGraw Hill private. The folks that bought the University of Phoenix!
| Peers | Valuation | Forecast PE | Long-term Growth | Dividend Yield | FCF Yield |
|---|---|---|---|---|---|
| TWOU.O | $3,051M | -509x | N/A | 0% | N/A |
| Publishers | |||||
| JWA | $3,011M | 17x | 15% | 2% | 9% |
| PSO | $6,777M | 12x | -7% | 7% | N/A |
| HMHC.O | $1,406M | -7x | 5% | 0% | 1% |
| LRN | $713M | 36x | 15% | 0% | 11% |
| Colleges | |||||
| APEI.O | $335M | 20x | -15% | 0% | 10% |
| CPLA.O | $810M | 20x | 9% | 2% | 10% |
| ATGE.K | $2,215M | 13x | N/A | 1% | 10% |
| BPI | $281M | 15x | N/A | 0% | 1% |
| CECO.O | $753M | 61x | N/A | 0% | N/A |
| LOPE.O | $4,295M | 23x | 16% | 0% | 5% |
| STRA.O | $994M | 27x | 1% | 1% | 6% |
| LAUR.O | $2,665M | -16x | -25% | 0% | 10% |
I've not the energy to do an net present value guestimate. It just seems bonkers. Sure if it's a software "SaaS" play, it's worth a big multiple as it'll have leverage and a moat... but if they are writing courses univerity by university, then isn't it really a consulting business? With little operational leverage?
And one last thing...they recently paid $103m for GetSmarter, which does short online courses, a biz that did $17m sales in 2016. If I apply that to 2016 figures...I get $1.2bn of value versus the current $3bn.
4. Wall Street thinks it's a Buy!
Even if I don't get it, the professionals on Wall Street do. They say Buy and have a $63.56 target for the stock, thouh implies a rather unexciting upside of 7%.
Now, they've beaten earnings for the last 10 quarters which is great, but given the multi-year contracts... surely they have a really good visibility on their numbers?
5. I've learnt nothing :(
I don't get it. Suggest you look at the Analyst Day Presentation too. Love to know if you are a buyer after those 129 pages!
I took particular issue with the idea of Cohort Margin. So they are EBITDA break-even on a a course in year 3. Does that mean before the capitalized costs of writing the courses?
I can't square the circle. Sorry.
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Submitted October 17, 2017 at 06:11PM by shane_stockflare http://ift.tt/2yothh4
