2U Inc.'s Biggest Growth Opportunities

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Going to college doesn't mean you have to step foot on a campus anymore, even if you want a degree from the University of North Carolina, Harvard, or Berkeley. 2U Inc. (NASDAQ: TWOU) makes the online programs from these schools a reality. The market for higher education is huge, and 2U is just getting started creating online degree programs and short courses for domestic and international markets and attracting students. Read on for more about how these opportunities have this company confidently projecting 30% growth through 2020 and beyond.

Growth in online graduate programs

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The largest revenue driver for 2U is creating online domestic graduate programs (DGPs). When it partners with a university to create a DGP, it provides the up-front capital, the technology platform, and its experience in creating 49 online programs with 23 universities. The school provides the course content and its brand name.

Once built, 2U receives a revenue share in the low to mid 60% range for every student who enrolls. After the up-front development costs are recovered in the first three to five years, the company expects $15 million to $17 million in annual revenue and $5 million to $6 million in EBITDA for each DGP.

2U is just getting started with the DGP opportunity. It plans to launch at least one domestic graduate program in 60 to 90 verticals with a long-term goal of roughly 200, which would provide steady-state revenue of $3 billion annually. Verticals are subjects or programs and 2U's current verticals include nursing, data science, legal studies, and social work. New programs are chosen by the company's proprietary selection algorithm, picking content that has the highest probability of success based on the university, degree vertical, and region.

The company is churning out DGPs at a furious pace and has consistently beaten its projections for adding programs. The company had launched 24 DGPs by the end of 2016 and is looking to triple that number by the end of 2020, getting it near 40% of its goal.

Internationally, the market for higher education is significantly larger than in the U.S. In its most recent analyst day, the company indicated that the market for higher education in the U.S. is $550 billion, whereas globally, it is $1.9 trillion. With the company's 2016 revenue of $205.9 million, this is a huge untapped opportunity. The company expects to start its first international graduate program in 2019.

Short Courses

In May 2017, 2U announced the acquisition of GetSmarter, an online short-course company based in South Africa. This partnership allows 2U to reach more students who are interested in professional certifications or just enhancing their knowledge of new technologies without having to enroll in a graduate program.

This acquisition brings together two similar cultures and platforms, but with a different student makeup. GetSmarter's courses are usually 8 to 12 weeks and cost less than $3,000, versus a commitment of two years or more and $70,000 for a graduate program offered through 2U's platform. Just recently, the company announced a blockchain strategy course in partnership with Oxford "to prepare executives for the blockchain revolution." This is a great example of how a short 8- to 12-week course can be quickly brought online to meet an emerging trend.

More students

While more courses and programs give the company opportunities for growth, having more students is the most profitable growth for the company. With a fixed cost to develop a course or program, having more students attend these classes makes the long-term profitability very favorable.

As of June 30, 2017, 2U had enrolled roughly 29,000 students. When the GetSmarter acquisition was announced in May 2017, the company noted that GetSmarter had served more than 50,000 students since its inception. GetSmarter set itself a "big hairy audacious goal" of having improved 1 million lives by 2030 via its short courses.

2U noted in its third-quarter investor presentation that it is seeing positive growth for its DGPs as more students complete programs, even after four or five years.

These growth numbers show that the programs that 2U develops have staying power and a long runway to payoff for its initial investment.

2U is committed to seeing growth above 30% for its DGP business for the "foreseeable future." The company has projected 2018's growth to be 38% to 39% including its short-course revenue. Add in growth for its international graduate programs starting in 2019 and this company has tremendous opportunities to continue to delight shareholders with growth well into the future.

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Brian Withers owns shares of 2U. The Motley Fool recommends 2U. The Motley Fool has a disclosure policy.

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