Gaotu Techedu Stock: Takeaways From Recent Rollercoaster Ride (NYSE:GOTU)

Elevator Pitch

I rate Gaotu Techedu’s (NYSE:GOTU) stock as a Hold. With my prior article for GOTU written on November 23, 2022, I performed a review of Gaotu Techedu’s Q3 2022 financial results.

I determine that a Hold rating for GOTU’s shares is fair with this latest update. Efforts relating to revenue diversification might pay off for the company this year, with expectations that Gaotu Techedu can deliver positive top line expansion in 2023. But GOTU could still potentially suffer from adverse regulatory developments in the future, and the delisting risk for Gaotu Techedu can’t be ignored especially since it is solely listed on the NYSE.

Key Events Impacting GOTU’s Stock Price In Recent Months

Based on Seeking Alpha price data, Gaotu Techedu’s share price surged by +230% from $1.00 (at the point of the publication of my earlier write-up) to $3.30 at the end of the February 8, 2023 trading day. GOTU’s shares have been on a rollercoaster ride in the past two and half months.

Gaotu Techedu’s stock price went up by as much as +293% from $1.00 at the start of the November 25, 2022 trading day to close at a new one-year high of $3.93 as of December 22, 2022. China’s decision to discontinue with its COVID-zero strategy and reopen the country had boosted the share prices of most Chinese companies in late last year, and GOTU was no exception.

But GOTU’s shares finished the year at a much lower stock price of $2.36 as of December 30, 2022. Gaotu Techedu’s stock suffered a beating in the final week of 2022 as a result of policy headwinds.

According to a December 29, 2022 Seeking Alpha News article, Chinese policymakers plan to place limitations on “fees paid for tutoring services and the timeframe in which the services may be offered” in the country. Earlier, there were expectations that China will put a stop to regulatory crackdowns on specific sectors including education, as the Chinese economy finds its footing. As such, the latest regulatory development for China’s tutoring market was perceived to be a negative surprise.

It is noteworthy that Gaotu Techedu’s share price subsequently recovered to register a new 52-week high of $4.51 on January 24, 2023 during intraday trading. This is possibly linked to the recent quarterly financial performance of its peer TAL Education (TAL).

TAL announced its Q3 FY 2023 results on January 19, 2023, and TAL’s stock price rose by +4% in the subsequent three trading day post-results announcement. As per S&P Capital IQ’s financial data, TAL’s actual Q3 FY 2023 top line of RMB233 million was just slightly (2%) below the sell-side’s consensus revenue estimate of RMB237 million. It is highly probable that TAL Education’s actual third quarter revenue was better than the whisper numbers (real buy-side investor consensus which could differ from sell-side forecasts), which offered positive read-throughs for GOTU’s future financial results.

However, good times didn’t last for long. GOTU’s stock price pulled by -27% in the next two weeks (after hitting the new 52-week peak in late-January) to end the February 8, 2023 trading day at $3.30.

A February 6, 2023 Seeking Alpha News commentary attributed the recent weakness in the share prices of Gaotu Techedu and other US-listed Chinese companies to the fact that “U.S.-China relations took a turn for the worse” following “the shooting down of a Chinese spy balloon.” Do note that Gaotu Techedu is solely listed in the US as of now, so a potential US delisting will be a very negative development for the company.

Recent Developments Point To A Mixed Outlook For Gaotu Techedu

The outlook for GOTU is mixed, taking into account the various developments that have affected Gaotu Techedu’s stock price in the last couple of months.

Looking on the bright side of things, peer TAL Education’s recent quarterly top line performance suggests that Chinese education companies in general have managed to find new revenue growth opportunities following the ban on after-school K-9 tutoring services in China. Consensus financial figures taken from S&P Capital IQ point to the sell-side analysts’ expectations of GOTU’s revenue (in local currency and RMB terms) growing by +0.6% and +19.1% for FY 2023 and FY 2024, respectively as compared to an expected -63.1% top line contraction for FY 2022.

Chinese stock brokerage China Merchants Securities highlighted in its January 3, 2023 research report (not publicly available) on GOTU that it expects Gaotu Techedu to derive 42%, 28%, 23%, and 7% of its FY 2024 revenue from senior high education, non-academic tutoring, adult education, and educational content segments, respectively. K-9 tutoring services used to account for about half of Gaotu Techedu’s revenue in 2021, but China Merchants Securities’ financial forecasts suggest that GOTU has the ability to make up for the loss of K-9 tutoring services (discontinued in February 2022) by growing revenue from other existing and new businesses.

On the other hand, new policies and other events affecting US-China ties imply that there are still substantial downside regulatory and geopolitical risks for Gaotu Techedu.

Although GOTU has shut down its K9 tutoring services business, there is always the risk that its other businesses like senior high education, non-academic tutoring, adult education might be negatively impacted by new regulations rolled out by Chinese regulators in the future. Gaotu Techedu’s meaningful share price correction in the last week of December 2022, as discussed previously, is a reminder of how GOTU’s business and stock price could be affected by negative regulatory developments.

Also, it is reasonable to be worried that there is a higher probability of Chinese companies, including GOTU, being compelled to delist from the US, if the ties between US and China continue to worsen. A review of Gaotu Techedu’s recent press releases and news flow suggests that the company doesn’t have any official plans to seek a secondary or dual listing on other stock exchanges.

Concluding Thoughts

In my opinion, GOTU deserves a Hold rating, after weighing the negatives of regulatory risks against the positives associated with a potential revenue turnaround.