Stock pick: 2U Inc. (TWOU) surfing the rising tide of digital education

A $30 billion market

Chart showing 1-month stock performance for 2U Inc.

Most days, some analyst upgrades a stock to a buy or initiates a rating with an outperform, but it’s not often that a whole swath of experts place buy ratings on a stock all at once.

Well, that’s what happened this week with 2U Inc. (NASDAQ: TWOU), a Landover, Maryland-based technology company that allows non-profits and universities to deliver cloud-based education to people no matter where they are. Credit Suisse, Needham & Co, Pacific Crest Securities, Goldman Sachs and others all started covering this stock with a buy.

All of these buys are coming at an interesting time. A lot of technology stocks have struggled over the last week—tech stocks on the S&P 500 are down nearly 2% in April—but, clearly, many analysts think that 2U, which only went public in March, will still be a winner.

The reason for the optimism isn’t so much that it’s in the hot tech space, but that it’s in a sector—education—that’s only really starting to go digital.

Jesse Hulsing, a Pacific Crest analyst, points out that it’s already working with a number of leading universities, such as Georgetown University, Berkeley and the University of South Carolina.

Essentially, universities use 2U’s platform to teach courses online. While Internet-based learning isn’t new, he thinks there’s still plenty of growth to come in this space. That’s been born out in the company’s revenue growth. In 2009, it made less than $5 million in revenue; it brought in more than $80 million in 2013.

Online education is a big business. Hulsing says it’s going to be a $30 billion market, and the company is only scratching the surface right now.

More than 95% of 2U’s 2013 revenues came from just four programs. It launched six more programs in 2013 and early 2014 and the company has said it will add four per year going forward.

Hulsing thinks its revenues will hit $133 million by 2015, but it could bring in as much as $1 billion in the future. “We think 2U is uniquely positioned to capitalize on a major secular shift in the education market,” he wrote in an April 22 report.

The one big potential downside is that the online education market becomes so crowded that its growth slows, but he’s optimistic that this company and its “high-end, high quality” services can be a leader in this space.

The stock is currently trading at $14.50 a share, but Hulsing has a 12-month price target of $17. According to S&P Capital IQ, the mean target is $19.86, while the highest 12-month price is $22.