Private or public, U.S. colleges and universities have a problem. State funding has been falling since the 1980s even as enrollment has been growing. That has been pushing tuition higher and higher, yet many colleges, especially public ones, are still strapped for cash. 

Even universities with the money to hire more faculty members won’t have the classroom and dorm space to accommodate such an influx of students. The solution: online programs. With a relatively modest investment in technology, universities can boost their enrollments without the expense of building out their physical plants and having students on campus. If the schools can find a partner to share the cost, so much the better.

That’s where 2U (NSDQ: TWOU) comes in. It provides a cloud-based software platform for nonprofit colleges and universities that want to offer degrees online. These aren’t the online courses that have mired some for-profit schools in scandals, like the predatory recruitment practices and poor educational outcomes that forced Corinthian Colleges into bankruptcy last year and ITT into liquidation. The programs 2U delivers are the same courses elite colleges and universities already teach their students on campus; they’re just delivered online.

Like the Campus, Only Online

The platform allows professors to deliver the same live, interactive lectures and post the same course materials, conferring the same degrees at the same cost to a student as a traditional campus-based program. In fact, 2U’s goal is to make online learning as much like the school’s on-­campus experience as possible. In most cases the degrees can be earned entirely online, though some, like the nurse-­midwifery program offered in partnership with Georgetown, require clinical training that 2U helps students set up locally.

So far, 2U has had a great deal of success partnering with 14 top-tier universities, including Yale, University of Southern California, George Washington University and Georgetown. The company offers 29 programs in 20 fields, ranging from nursing and physician’s assistant to data analytics and international relations. Since its 2008 launch, 2U has served nearly 18,000 students, with an 84% graduation rate, which is comparable to students on campus. The company has yet to lose a university partner thanks to those strong successes, with many schools adding new programs and renewing contracts well before they expire.

The Coming Turnaround

That’s the good news. The bad news is 2U isn’t profitable yet, mainly because it funds the program’s initial development for new partner schools, develops the custom platform and is responsible for recruiting students. The company also continues to launch new programs, introducing six this year and nine in 2017. That said, I expect a turn to profitability in the next 18 months for several reasons.

First, the funding pressures many colleges and universities face will only get worse with a Republican president and Congress that show little interest in funding education at the state or federal level. Still, President-elect Donald Trump has said that he wants to ease restrictions on student lenders and cap loan repayments for borrowers at 12.5% of income, with loans forgiven after 15 years of payments.

That will make tuition less onerous for borrowers, boosting enrollments further and pushing universities to bridge the cost gap by offering more online courses. Given 2U’s success in opening doors with elite universities, it will find it easier to recruit new partner schools.

Plus, 2U’s founder and CEO Chip Paucek is no stranger to education. He cofounded Cerebellum Corp. in the early 1990s, which produced the “Standard Deviants” PBS television series, a fond memory for many millennials like me. The program taught us math, history and science in a format similar to sketch comedy. Paucek also led the marketing efforts for Educate Inc. and was CEO of Smarterville, perhaps best known for its “Hooked on Phonics” program.

Big Potential

Typically retaining just over 60% of tuition revenue, 2U has the potential to have high margins. With no contracts up for renewal untilthe end of 2021, if 2U recruits new partners judiciously, staying with similar programs like the ones it already provides, that would translate into free cash flow in fairly short order. This is especially true considering the company’s track record for strong revenue growth; revenue nearly doubled from $83.1 million in 2013 to $150.2 million last year.

The valuation, I must admit, looks high, but that’s mostly because the rest of the online education industry is in such bad shape. There’s no price-to-earnings to address as 2U isn’t profitable, but it is trading 8.5 times its book value and 8.4 times sales. That’s nearly twice the industry average on both scores, mainly because most of 2U’s peers have such bad reputations investors won’t pay much for the shares. The company’s three-year revenue growth has averaged more than 39%, compared to the online college courses industry that, frankly, is contracting and lucky to still be in business.

Buy 2U under $45.