Spruce Point Capital Releases a Strong Sell Forensic Research Opinion on 2U, Inc. (Nasdaq: TWOU)
NEW YORK, July 19, 2018 /PRNewswire/ -- Report entitled "A Short Course To Dispel The 2U Bull Case" outlines how 2U faces 30%-50% downside risk, or $47.00 to $65.00 per share, as a result of documented evidence that its core business model is being disrupted by new fee-for-service competitors. As a result, we believe it impossible for 2U to meet its steady-state long-term projections and Wall Street expectations.
- 2U Has A Significant Number of Programs That Are Underperforming: Spruce Point's primary research, which includes several FOIA requests, indicates that eight of the fourteen programs launched between 2013-2015 are under performing 2U's steady state program expectations. We also believe four of the top seven programs have peaked and/or seen enrollment declines and that FOIAs indicate MBA@UNC's last four starts have all seen YoY declines. These struggles highlight the Street's significant risk in extrapolating 2U's guided steady-state program performance to model 2U's new and future programs.
- Industry Take-Rates and Tuition Costs Are Declining: 2U's revenues are a function of its take-rates (i.e. % of revenue share) and revenues derived from tuition programs. 2U currently guides investors to "Low to Mid 60%" take-rates. However, based on a recent FOIA we find that competitors are driving take-rates to 40%. In addition, our research reveals that the three most recent MBA program launches (Simmons Enterprise '16, University of Dayton '17, University of Denver '18) charge tuition that is on average 40% less than the first three MBA program launches (UNC '11, Syracuse '15, American '15).
- Executive Departures and Insider Selling Serve As Warning Signs For Investors: 2U executive turnover, including its former Chairman and CEO who left to launch a disruptive competitor, has accelerated since 2015 with four C-suite executives having left the firm. Despite 2U burning $225m of negative free cash flow since 2011, insiders have made out like bandits selling $148m of stock. Approximately 25% of sales have been the CEO, who recently adopted a new 10b5-1 program in March 2018 ahead of its recent capital raise, and can start selling again next week post lock-up.
- A Terrible Risk/Reward At Current Price Levels: Analysts have relentlessly said "Buy" and currently have an average price target of $99/sh, which represents just 6% upside. Analysts fail to appreciate the change in competitive dynamics, and extrapolate 2U's current performance into the future without having done the exhaustive FOIA and program analysis we've undertaken to clearly understand the state of the business. Once reality sets in that 2U's best days are behind it, and it begins disappointing unrealistic Street expectations, we expect 2U's lofty 9.5x and 180x 2019E sales and EBITDA multiple to materially contract.
The research report can be found on our website at www.sprucepointcap.com and updates will be posted on twitter @sprucepointcap.
Spruce Point Capital has a short position in 2U, Inc (TWOU) and stands to benefit if its share price falls.
About Spruce Point Capital
Spruce Point Capital Management, LLC, is a forensic fundamentally-oriented investment manager that focuses on short-selling, value and special situation investment opportunities.
