Lacklustre Performance Is Driving 2U, Inc.'s (NASDAQ:TWOU) 31% Price Drop

The 2U, Inc. (NASDAQ:TWOU) share price has fared very poorly over the last month, falling by a substantial 31%. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 54% loss during that time.

After such a large drop in price, considering around half the companies operating in the United States' Consumer Services industry have price-to-sales ratios (or "P/S") above 1.6x, you may consider 2U as an solid investment opportunity with its 0.4x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for 2U

What Does 2U's Recent Performance Look Like?

2U could be doing better as it's been growing revenue less than most other companies lately. It seems that many are expecting the uninspiring revenue performance to persist, which has repressed the growth of the P/S ratio. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on 2U.

Do Revenue Forecasts Match The Low P/S Ratio?

2U's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. Still, the latest three year period has seen an excellent 68% overall rise in revenue, in spite of its uninspiring short-term performance. So while the company has done a solid job in the past, it's somewhat concerning to see revenue growth decline as much as it has.

Turning to the outlook, the next three years should generate growth of 6.8% per annum as estimated by the analysts watching the company. That's shaping up to be materially lower than the 11% each year growth forecast for the broader industry.

With this information, we can see why 2U is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From 2U's P/S?

2U's P/S has taken a dip along with its share price. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that 2U maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

We don't want to rain on the parade too much, but we did also find 3 warning signs for 2U (1 doesn't sit too well with us!) that you need to be mindful of.

If these risks are making you reconsider your opinion on 2U, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.