2U Can Yield 20% EBITDA Margin Long Term Despite Multiple Unprofitable Programs In Portfolio: Analyst Forecasts

Needham analyst Ryan MacDonald reiterated a Buy rating on 2U, Inc. TWOU, lowering the price target to $9 from $15. 

TWOU recently reported worse-than-expected Q2 results, where revenue decreased 8% to $222.1 million. 

While TWOU reiterated its FY23 revenue outlook and increased adjusted EBITDA, the analyst cautions that the driver of the miss was a revenue shortfall related to expected payments associated with the sunsetting of multiple programs that pushed from 2Q into 2H23.

MacDonald thinks that the sunsetting of these unprofitable programs, generating a one-time earnout, creates a heightened uncertainty in the business's growth trajectory heading into FY24. 

Despite the weak Q2, management reiterated its FY23 revenue guidance of $985 million-$995 million, as the expected earnouts from the sunset programs are now expected to occur in 4Q23. 

At the same time, the Alternative Credentials segment will benefit from strong growth in the emerging enterprise business.

However, on the positive side, the analyst believes the company's scaled unit economics can support a 20% EBITDA margin longer term. 

The analyst notes that 2U continues to focus on shifting offering highly selective and expensive programs to those with greater access and affordability. 

The analyst adds that a key component of this rotation is the introduction of the flex program offering, which 2U now expects to launch 50 in 2024, up from 25 due to the strong market demand for the offering.

Price Action: TWOU shares are trading lower by 27.6% to $3.09 on the last check Wednesday.