Fintel options data showed a spike in bearish bets against the educational tech provider on the result day
Educational technology provider 2U Inc (NASDAQ:TWOU) rallied a stellar 29.7% higher on Friday after the company reported a strong fourth quarter result ahead and 2023 outlook above the market’s expectations.
The result has acted as the latest share price catalyst following 2U’s debt refinancing in early January which lowered the firm’s annual interest payment obligations.
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The bullish rally brings 2U’s rolling one year rolling stock return to a relatively flat level but well below all time highs of around $100 a share reached in 2018.
Some investors were not convinced by the spark of optimism with Fintel’s options trading data reporting a large spike in TWOU net premium sold on Friday
During the fourth quarter, 2U’s sales decreased by 3% to $236.0 million when compared to Q4 of 2021 and slightly beat analyst polled forecasts for around $235 million.
The firm's degree segment sales fell -10% to $137.1 million with the weakness offset by growth of the alternative credential segment sales by 8% to $98.9 million.
Underlying profits measured by adjusted EBITDA jumped 178% to $58.4 million and came in 16.5% of consensus forecasts of $50 million.
Net losses narrowed by 82% over the year to -$11.8 million or negative 15 cents per share. On an adjusted view, net income rose 225% to $18.5 million or earnings per share of 23 cents. Analysts were expecting an EPS figure of around 21 cents.
2U’s CFO Paul Lalljie highlighted that in 2023, the company expects the alternative credit segment to contribute to profitability for the first time in the company’s history.
During the result, 2U’s management provided financial guidance for 2023 with the expectation to generate between $985 to $995 million in sales and positive adjusted EBITDA of $155 to $160 million. The guidance implies a return to sales growth during the year with solid profit growth.
Net income losses are expected to narrow from -$322 million in 2022 to between -$90 to -$95 million in 2023 and the firm expects to reach positive free cash flow.
Goldman Sachs analyst George Tong thinks 2U will see a step-up in degree program launches in 2024 that will assist in double-digit sales growth and EBITDA margins in the high-teens.
Tong believes a return to revenue growth and operating performance with recent balance sheet improvements will drive valuation upside in the stock. Goldman Sachs remains ‘buy’ rated on TWOU with a $12.60 target price.
Fintel’s $10.50 consensus target price suggests the stock is looking overvalued post-rally with a projected -18.05% share price return over the next year.
The consensus target price will likely be revised higher over the next week as analysts factor in the 2023 guidance into financial modelling.
Research from the Fintel platform revealed a large spike in net premium sold during the trading day following the release.
-$317.1 million of net long premium was sold during the day, driven by $472.8 million of call premiums sold in the stock.
This compares to $28 million of net long premium bought on Thursday and $2.5 million bought on Wednesday.
The snapshot below highlights a summary of call premium bought and sold for TWOU over the last week.
Aside from the bearish options trades which occurred on Friday, sentiment in the options market seems relatively bullish, explained by a put/call ratio of 0.40.
The Fintel created ratio examines all of the put and call open interest over time and combines it into a ratio to determine whether sentiment is bullish or bearish. A ratio below 1 indicates bullish sentiment exists from a stock.
The chart below shows how this ratio has behaved (green line) over the last year compared to the stock price. The red line shows the abnormal spike from volume traded on Friday.
Article by Ben Ward, Fintel
