In mid-2021, Gaotu Techedu (NYSE:GOTU), alongside other Chinese stocks listed in the U.S., experienced a steep decline following China’s ban on for-profit academic tutoring. This led to significant financial losses and operational challenges for the firm. The company has managed to come back from the unexpected downturn with a strategic pivot that has captured the attention of investors and Wall Street analysts alike.
Fall and Return of Gaotu Techedu
U.S.-listed Gaotu Techedu Inc. is a tech-based education firm located in Beijing, China, which offers online courses and tutoring services, catering to K-12 and professional qualification exams.
In July 2021, a ban on for-profit academic tutoring of students in compulsory education years was introduced in China. This unexpected restriction led to a widespread sell-off in U.S.-listed Chinese stocks and illustrated the potential risks of investing in Chinese companies. Education firms had to abandon their primary business operations, resulting in staff lay-offs, closure of numerous learning centers, and substantial financial losses.
However, a year and a half post-Beijing’s restrictions on after-school tutoring businesses, Chinese education firms have demonstrated a partial recovery. This recovery is attributed to the companies uncovering new revenue streams. Gaotu Techedu has pivoted to livestream shopping. Despite declining more than 90% from its 2021 peak and enduring a significant drop in market value, this move has initiated an unlikely comeback in GOTU stock. Shares have rallied over 198% in the last three months.
Financial Highlights
In Q4, Gaotu Techedu’s revenue of $107.19 million exceeded analysts’ consensus of $100.49 million. Founder, Chairman, and CEO Larry Xiangdong Chen highlighted that the company witnessed a significant rise in demand for its high-quality educational offerings and learning services.
However, it has been the pivot to livestream shopping that has given the company a jolt. Net revenues increased significantly by 20.9% year-over-year in Q4 2023, and the company recorded a 28.1% jump in gross billings.
Gaotu Techedu anticipates the existing acceleration to persist into the future. Based on the company’s current projections, total net revenue growth for Q1 2024 is expected in the range of 28.4% to 31.2%.
What is the Outlook for GOTU in 2024?
GOTU trades at the high end of the 52-week range of $2.22 to $8.42, with bullish technical indicators – above the 20-day moving average price of $4.53 and a 50-day moving average price of $3.94. It trades above industry and historical averages on a price-to-book basis (4.77x).
Citi analyst Mark Ru Li recently upgraded GOTU to Buy from Sell with a price target of $4.50, up from $2.48. He cited the recent surge in viewership for GaoTu JiaPin’s livestreams, which will provide a “significant yet transient boost in engagement” and bring “substantial, albeit intangible,” benefits to the company.
GOTU is rated a Moderate Buy based on reviews of three Wall Street analysts in the past three months. The average price target is $5.37, representing a 31.33% downside from current levels.
In Conclusion
The road to recovery for Gaotu Techedu after the tutoring ban has been challenging. Yet, the company’s strategic pivot to the lucrative livestream shopping sector has initiated a revival, paving the way for an upside. If the surge in viewership and engagement on their livestreams can be sustained, it will promisingly contribute to the company’s ongoing rejuvenation.
However, investment in Chinese stocks comes with its share of risks. Regulatory pressures on China’s private sector may have softened recently. Still, without warning, the Chinese government can issue guidelines limiting how much companies can charge, what services they can offer, and when business can be conducted.
