When 2U went public ten years ago, the company aimed to demonstrate its capability to thrive in the challenging $550 billion U.S. higher education sector.
For a period, it seemed to be succeeding. The stock price surged from $13 at 2U’s 2014 IPO to a peak of $98.58 four years later, driven by growing demand for the company’s online education services.
At its zenith, 2U commanded a market capitalization exceeding $5 billion, with growth rates akin to those of top-performing cloud software firms. Revenue surged by 44% in 2018.
Currently, the company is facing severe challenges. 2U’s stock has consistently traded below $1 throughout 2024, triggered by a troubling forecast in November and signs of universities discontinuing their contracts.
Recently, 2U provided a bleak outlook for the year and cautioned investors about the “substantial doubt about its ability to continue as a going concern” without additional capital or debt reduction.
Following this announcement, 2U shares plummeted by 59%, with an additional 10% drop on Wednesday, closing at 34 cents. This valuation pegs 2U at $27.5 million.
Needham analysts downgraded their rating from buy to hold after the report, expressing increased skepticism regarding 2U’s capacity to refinance its debt, which amounted to over $900 million by the end of 2023. Meanwhile, cash reserves shrank from $182.6 million at the close of 2022 to $73.4 million.
Established in 2008, initially as 2Tor, the company formulated a strategy centered on assisting universities in expanding their student base through online classes.
For a considerable period, a significant portion of 2U’s revenue was derived from a handful of colleges.
In 2017, more than half of 2U’s revenue originated from partnerships with the University of Southern California (the company’s inaugural program), Simmons College in Boston, and the University of North Carolina.
Eventually, 2U managed to diversify its client base, with no single university accounting for more than 10% of revenue by 2021.
However, the primary challenge persisted: 2U’s business model failed to yield profitability. Since becoming a public entity, 2U has reported annual losses, accumulating a total deficit exceeding $830 million over the past three years.
A significant portion of 2U’s revenue was allocated to sales and marketing expenses, and the company had to allocate substantial financial and other resources to technology and production to support its expanding array of offerings, as outlined in its 2021 annual report.
How 2U has been trying to hold the crisis?
Instead of conserving funds, 2U pursued aggressive M&A strategies.
In 2019, it invested over $600 million to acquire Trilogy Education, expanding its university partnerships. Subsequently, in 2021, 2U disclosed its intention to purchase edX, an online learning platform, for approximately $800 million in cash.
This acquisition was anticipated to augment 2U’s educational partners to more than 230, including 19 of the top 20 universities worldwide, according to a joint release.
However, this strategy backfired. Financing the edX acquisition with debt led to interest payments surpassing edX’s generated revenue, as noted by Cantor Fitzgerald analysts in a report last year.
Instead of conserving funds, 2U pursued aggressive M&A strategies.
In 2019, it invested over $600 million to acquire Trilogy Education, expanding its university partnerships. Subsequently, in 2021, 2U disclosed its intention to purchase edX, an online learning platform, for approximately $800 million in cash.
This acquisition was anticipated to augment 2U’s educational partners to more than 230, including 19 of the top 20 universities worldwide, according to a joint release.
However, this strategy backfired. Financing the edX acquisition with debt led to interest payments surpassing edX’s generated revenue, as noted by Cantor Fitzgerald analysts in a report last year.
By early 2022, sales growth had slowed to single digits, eventually declining. Revenue dropped year-over-year for five consecutive quarters, prompting multiple rounds of layoffs In the third quarter of 2023, a significant setback occurred.
During its November earnings report, 2U disclosed that USC, its flagship client, paid $40 million to terminate their partnership, prompting a downward revision of the full-year forecast.
In response, the stock plunged 57% in a single day. Shortly after, Paucek resigned then, Paul Lalljie became the CFO.
The third quarter of 2023 brought a catastrophic blow.
2U revealed in its November earnings report that USC, its flagship client, was terminating their relationship by paying $40 million to 2U.
Consequently, 2U revised its full-year forecast, triggering a 57% plunge in the stock price in a single day.
With stocks trading below $1 for 30 consecutive days, a delisting from Nasdaq looms. While 2U could implement a reverse split to boost share prices, it’s viewed as a temporary solution to a larger issue.
Cantor Fitzgerald, KeyBanc, and Piper Sandler have ceased coverage of the stock, signaling waning confidence in the company’s future.
Far from its growth trajectory, 2U is now focused on survival.
During the recent earnings call, Lalljie outlined a 12-quarter reset plan, involving expense reductions and negotiations with lenders on debt payments.
“We need to shrink to grow,” Lalljie emphasized, “to bolster our balance sheet, extend upcoming debt maturities, and ensure financial resilience moving forward.”
