Gaotu Techedu (NYSE:GOTU), a Chinese tech-based education firm, got off to a scorching start at the beginning of the year, with its stock surging by 120%. However, following unsatisfactory Q1 results and Q2 revenue guidance that has undershot market expectations, the company’s stock has pulled back, losing close to 40% of its value since mid-May.
Despite this price drop, the shares still trade at a premium to the company’s peers in the industry. Given the company’s earnings volatility and the stock’s negative momentum, investors may want to hold off on Gaotu Techedu until its performance, future outlook, and present valuations are more positively aligned.
Gaotu Finds Its Mojo, Then Loses It
Gaotu is a U.S.-listed education company based in China that provides online tutoring and educational services. The organization uses a live large-class format for course delivery and extensively leverages big data analytics to improve teaching delivery, student learning experience, and operational efficiency.
In July 2021, a ban was imposed on for-profit companies that tutor students in mandatory education. This ban significantly impacted the company, leading to a sharp decline in its stock value. The restrictions led to intensive layoffs, closures of several learning centers, and massive financial losses. Despite these challenges, the firm has shown resilience, primarily by discovering new revenue streams, such as pivoting to live-stream shopping.
Enthusiasm for the company’s turnaround helped lift the shares from a low of $0.64 in the late fall of 2022 to the robust upswing enjoyed earlier this year. However, the recent disappointing quarterly report let some of the air out of the balloon.
Gaotu’s Recent Financial Results & Outlook
For the first quarter of 2024, the company reported revenue of RMB946.9 million, an increase of 33.9% from RMB707.3 million in 2023, slightly surpassing analysts’ expectations. This growth was attributed to strong market demand for the company’s learning services.
However, the growing sectors of the company, which include one-on-one classes, smart textbooks, and offline classes, are less profitable compared to the primary online large-class tutoring services, resulting in a reduced gross margin.
Sales and R&D expenses also increased significantly, negatively impacting operating profitability and contributing to the company’s operating loss of RMB77.7 million. This is a significant contrast to the previous year’s income from operations of RMB95.1 million.
Looking forward, Gaotu Techedu predicts a 30.4% increase in revenue to RMB918 million in Q2 2024, a forecast that has fallen short of consensus expectations and has been broadly disappointing.
What Is the Price Target for GOTU Stock?
Analysts following the company have taken a cautiously optimistic stance on the stock. For example, Citi analyst Alice Cai recently reiterated a Buy rating on the stock with a $12.34 price target. She noted that higher sales and marketing expenses could continue negatively impacting near-term profitability, yet she remains constructive about the firm’s long-term revenue trajectory.
Overall, Gaotu Techedu is rated a Moderate Buy based on two analysts’ recommendations and price targets recently assigned. The average price target for GOTU stock is $10.47, representing a potential upside of 113.67% from current levels.
The stock is up over 35% year-to-date, but with the recent slide in price, it now trades in the bottom half of its 52-week price range of $2.22 – $8.44. Yet despite the downturn in price, the stock looks to be trading at a relative premium to industry peers, with a P/S ratio of 2.87x compared to the Education and Training Services industry average of 1.55x. Also, the shares demonstrate negative technical indicators, such as trading below major moving averages.
GOTU in Final Analysis
Gaotu’s stock has demonstrated notable volatility over the past few years, with significant surges and drops in price. Yet, the company has exhibited the ability to recover and adapt by identifying new income avenues like live-stream shopping, contributing to a promising long-term revenue trajectory. However, considering the current valuation, potential investors might consider a strategic pause until the company’s performance and future prospects can reignite more positive price momentum in the shares.
