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Online education platform 2U (NASDAQ:TWOU) fell over 25% on Friday after Cantor Fitzgerald downgraded the stock to “Neutral” and said that 2U’s inability to generate positive FCF coupled with its looming debt maturities has investors asking questions.
In its third-quarter results, the company saw its per-share loss about $0.02 wider than analyst expectations, while revenue beat estimates by about $5.67M. Its segments, degree, and alternative credential businesses saw either flat or dipping revenues.
“In 3Q23, revenue was better than expected, as was adjusted EBITDA, but this was due to TWOU receiving $25.8m of contract termination payments. Excluding these, revenue would have been 9.0% below consensus,” said analysts at Cantor Fitzgerald.
While the company said that it expects to receive ~$110M ($80M in 4Q) in termination payments from universities that are effectively buying their degree programs back from 2U, Cantor said that the cut in revenue guidance highlights the weakness in its businesses.
2U now expects its fiscal revenues to be in the range of $965M to $990M, vs. consensus of $979.82M.
Cantor Fitzgerald also slashed its price target on the company to $1.50 from $5.30, representing a downside of about 13.7% to its trading price as of 9:57 ET.
Noting 2U’s depleting cash balances, 3Q ended with $41m down from $53m at the end of 2Q, and the looming maturity of its convertible notes, the analysts commented that the company would need to rectify its debt problem.
“We believe it can either issue equity (which would result in a 173% increase in share count based on current prices) or refinance that debt with new debt. Under the latter option, we believe interest payments would meaningfully increase,” the analysts added.
Since the start of the year, TWOU has fallen about 72.58%, and is rated “Sell” by Seeking Alpha’s Quant rating system.