Why 2U (TWOU) Shares Are Plunging Today

What Happened:

Shares of online education platform, 2U (NASDAQ:TWOU) fell 12% in the morning session after company reported second quarter results, which missed analysts' expectations for revenue and operating income. Notably, revenue declined year on year overall and in all reportable segments, which is a worrisome sign. In addition, free cash flow turned negative and gross margin declined. As a reminder, the company implemented a platform strategy and refreshed marketing framework about a year ago, and these results show that those changes are not bearing fruit, calling into question the longer-term direction and go-to-market strategy for 2U. 

Looking ahead, the company provided full year revenue guidance, which came in ahead of consensus. Adjusted EBITDA guidance for the full year was raised from $157 million - $163 million to a previous range of $160 million to $165 million. However, the markets were not convinced and struggled to digest the poor results, which came in below Wall Street's expectations across the board.

The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy 2U? Access our full analysis report here, it's free.

What is the market telling us:

2U's shares are very volatile and over the last year have had 89 moves greater than 5%. But moves this big are very rare even for 2U and that is indicating to us that this news had a significant impact on the market's perception of the business. 

The previous big move was three months ago, when the stock gained 6.86% on the news that the company reported first-quarter revenue in line with analysts' expectations although EBITDA and free cash flow beat. Full year revenue guidance of ~3% growth was reiterated while EBITDA guidance was raised, which is a positive. Additionally, the company provided further information on the lawsuit filed against the Department of Education (DoE), clarifying that the complaint would be much less arduous (and less expensive) for the Company than a more involved suit.

2U is down 51% since the beginning of the year, and at $3.09 per share it is trading 75.9% below its 52-week high of $12.81 from February 2023. Investors who bought $1,000 worth of 2U's shares 5 years ago would now be looking at an investment worth $42.85.

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