Why 2U (TWOU) Stock Is Nosediving

What Happened:

Shares of online education platform, 2U (NASDAQ:TWOU) fell 14.7% in the morning session after the company reported third quarter results and provided full-year revenue guidance that missed analysts' expectations. Management said its coding boot camps and some of its higher-priced degree programs did not perform well due to lower demand. As a result, 2U is planning to exit some of these programs with its partners. This puts a dent in one of the bull cases for 2U as a facilitator and beneficiary of demand for STEM education products. 2U also announced plans to improve its liquidity and financial position in the coming months to shore up its balance sheet. Specifically, 2U said it is in talks with noteholders to refinance some of its debt. It also expects to receive over $100m in payments from institutions buying back their programs. Lastly, the company announced a 12% headcount reduction in Q3'23, resulting in an expected annualized cost savings of $55 million. 

In terms of new product launches, 2U announced it will create 80 new degree programs in 2024, which are expected to add $120 million in incremental annual revenue once ramped. While the future initiatives may be tailwinds, it was a disappointing quarter for 2U, highlighting several challenges.

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What is the market telling us:

2U's shares are very volatile and over the last year have had 83 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 biggest move we wrote about over the last year was 3 months ago, when the stock dropped 12% on the news that 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.

2U is down 80.8% since the beginning of the year, and at $1.21 per share it is trading 90.6% 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 $23.05.

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