Summary
- 2U stumbled after posting Q2 earnings despite a beat to Wall Street expectations, the first earnings disappointment in many quarters.
- Similar to high-profile takedowns of the likes of Netflix, 2U's high valuation is finally catching up to it.
- The company's business model isn't as scalable as other tech companies, as it requires immense setup and content creation to onboard a new university.
- Shares still have further to fall, especially as 2U's losses continue to mount and expose its deteriorating margins.
I've been bearish on 2U (TWOU) for quite some time now, but until the company's recent Q2 earnings stumble, which sent shares down 6% despite a beat to top and bottom-line estimates, the company has only traded up. In my view, the company has begun to enter into a reversal phase that will dial back the company's extremely high valuation. Investors, in dumping shares of recent outperformers like Netflix (NFLX) and Twitter (TWTR), have shown a shift in preference toward more value-oriented names, and 2U is anything but.
To 2U's credit, the company has done an incredible job of recruiting world-class universities and spinning up its narrative on a silver platter to Wall Street. The company's tagline of creating online course content for thousands of students has played well in investors' ears, particularly when blue-chip educational technology ("ed-tech") companies are in short supply. The below snapshot, taken from 2U's August investor deck, showcases its collection of top-tier universities:
