Company Analysis:
2U is a provider of software as a service (SaaS) to postsecondary institutions across
the United States. Its innovative online learning platform provides postsecondary
institutions with the ability to attract, enroll, educate and support students through its
unique cloud based SaaS platform. 2U generates revenue by charging a percentage of
tuition of those enrolled in the online educational services they provide through
postsecondary institutions.
2U has signed several recognized institutions into long term contracts to provide
their cloud based service. Postsecondary institutions may not have the capabilities or
interest in developing these capital-intensive infrastructures by themselves and therefore
can contract this work to the 2U company. These contracts include maintenance of the
system, and regular maintenance and improvements.
When assessing the value of 2U Inc., a few things to consider are the experience and
expertise of management as well as the strength of revenues and cash flows. Despite 2U
having scarce financial history, making it harder to predict future performance, all of these
aspects can allow for a better understanding of the company value.
Having a good management team is essential to having a successful business as it
ensures good decisions. Good management is the basis for performance, growth and
profitability. Although the company is relatively new, a lot of the managers at 2U have
extensive experience working in similar positions and industries across comparable
companies. For example, Christopher Paucek, co-founder of the company, has a lot of
experience in education, while Catherine Graham previously worked for various online and
financial technology companies before becoming chief financial officer at 2U. With these
managers, and many others 2U appears to have a successful team assembled.
Despite having negative earnings in the first few year of operations, it can be argued
that the company is a micro-cap with a valuation of (xxx) million. Revenues at such an early
stage are growing rapidly, from 29.7 million in fiscal year 2011 to over 83 million in 2013.
This resulted in revenue growth rates over the last two years of roughly 88% and nearly
50% in the fiscal years of 2012 and 2013 respectively.
Because the company has such high growth, they currently have a cash deficit. This
suggests that 2U is growing above their sustainable growth rate. Some companies that have
high initial growth rates, have the paradox of growing broke- when a company can be very
profitable but still not have sufficient cash to pay for operations of the business. Issuing
equity, through their IPO, and outsourcing are some alternatives 2U is using to fund their
operations despite their cash deficit. As 2U continues to expand, they expect economies of
scale to outweigh the added costs, decreasing their costs as a percentage of revenues. With
these resources, they can continue to grow, to eventually provide their platform to more
and more institutions across the US.
-Debt?
Industry Analysis:
The firm of 2U is education and technology-based, the industry has its positive and
negative aspects.
Education is a stable industry in the sense that it is an essential commodity to our
society and it is expected to be stable, if not expanding, in the near and long-term future.
Currently online education is becoming more popular across universities and other postsecondary education institutions. This allows for companies, such as 2U, to sneak in and
capture some of the expected increase in market share.
Technology is also a growing industry that has booming popularity across various
market segments. The current information age has increased the use of information
technology making this a more attractive industry. With these growing industries, comes
growing competition and barriers to enter.
One of the cycles of the industry involves the patterns of revenues. Revenues and
cash flows tend to fluctuate substantially because of the education industry, where courses
start at various times across the education platforms that use their service. This means that
the timing of revenue from tuition has a high degree of fluctuations for different semesters,
and consequently affects the cash flow cycle of the company.
The industry requires a lot of innovation in order to remain competitive. This is
considered another barrier to entering the industry, as technology is constantly updating
and can also be expensive. A fast changing industry requires timely movement as well as
innovative content, marketing and technology to survive. Technology follows Moore’s law,
meaning that every two years the power of processing doubles, thus requiring constant
revision of technological processes as they outdate themselves.
Macro Analysis
With the prevalence of Wi-Fi allow access of cloud based learning globally, students are
taking the opportunity to learn on the go from wherever they are situated. Universities and
colleges have realized the potential revenue source as a higher margin than traditional campus
based models. Cloud based computing removes the up front costs of property, upkeep, and
maintenance. The education industry is currently evolving into accessible online learning
platforms, and firms such as 2U, are part of this change. Competitively, all these developments
come with significant ability for rapid change, leaving laggards behind.
Post-secondary institutions have steady growth as the U.S population continues to grow.
Cloud based learning allows for them to capital on this growing market, allow for them to obtain
more students, even if the student is located in an area without a physical campus. According the
National Center for Education Statistics, between 2000 and 2010, the number of 18-24 year olds
attending post secondary schooling increased from 27.3 to 30.7 million, an increase of 12%.
With more and more young people turning to post secondary education to prepare them for
careers, 2U will be able to take advantage of this with their partnerships with universities and
unique cloud based systems and content.
School Enrollment
Enrollment (in millions)
25,000
20,000
15,000
10,000
5,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
School Enrollment
The U.S market has grow significantly over the past 30 years, and has recently rebounded
from the past recession in 2007. 2U stands to gain from increased GDP growth in the US at 2.6%
for 2013 and projected to increase to 2.8 for 2014. Consumer confidence at multi year highs,
more people are turning to post-secondary education than ever before. As education becomes
more and more of a requirement in today’s job market, people are required to have
degrees/diplomas in the respected fields.
GDP (in trillions)
GDP
18
16
14
12
10
8
6
4
2
0
GDP
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Year
With a growing GDP attributed to the increase in consumption from the population, and an
increasing population, the macro environment is improving for growing firms offering essential
commodities.
Population (in millions)
Population
320
315
310
305
300
295
290
285
280
Population
Year
POINTS FROM VIJAYS EMAIL:
Attributes that makes a company good for an IPO: (included in company analysis)
How does 2U compare? (in company analysis)
Market climate: (how favorable?)
IPO timing: (how appropriate is it)
3 Methods (which one most appropriate, why, show 2Us valuation)
EV
SHARE PRICE
# of shares
Recommendations:
Discounted Cash Flow:
Assumptions:
-
When starting a DCF calculation, we must first look at valuing the equity of a
company.
We took 6 comparable companies and unleveraged their betas accordingly, using a
tax rate of 35%. (ref) After finding the average and median betas, we calculated the
WACC using CAPM. We made an assumption using the risk free rate from the 10
year (3.67%) and 30 year (2.77%) treasury bill. We used these values to calculate
our wacc.
-
-
We found our most comparable companies to be CPLA and BPI because similar to
2U, they both started earning a net loss and eventually earned a profit through
company growth.
We also make an assumption about the going concern because the company is
relatively new and we see them operating in to the foreseeable future.
The main assumptions are made through our free cash flows.
o 1) We modeled the growth rate of 2U by mirroring CPLA’s growth rate when
they had a negative EBIT margin going in to the positive one, because they
were the most comparable company. We used the years 2001-2007 for CPLA
since these were the years that they went from having negative growth to
positive growth, similar to 2U.
o 2)
For the DCF, we’re assuming 2U is basically a big capital expenditure and we’re
simply valuing the business internally without comparing it to similar firms in the
industry.