Why Gaotu Techedu, New Oriental Education, and TAL Education Stocks Sold Off Today

What happened

Tuesday is shaping up to be a rough day for Chinese for-profit education stocks — even on a generally ebullient, bad-banking-news-free day in the US market.

The broads S&P 500 index was up a solid 2.1% as of 11:30 am ET, but shares of China’s New Oriental Education & Technology Group (EDU -0.20%) were off 7%, Gaotu Techedu (GOTU -1.42%) limited slide by 7.6%, and TAL Education (TAL 0.18%) was doing worst of all — down 12.4%.

So what

According to the market watchers at StreetInsider.com, TAL is to blame for the segment’s sell-off.

According to SI, “local Chinese papers” reported Tuesday that TAL in particular is experiencing troubles with its non-academic tutoring business. That’s really all we know right now. Whichever papers SI is referring to don’t appear to be big enough for their headlines to register on Google — because there’s zero news on this in the English-language press so far.

So my first advice to investors who own shares of these companies would be don’t panic — at least until we know more about these reports out of China. Don’t sell Chinese education stocks just because everyone else is selling them, because if you do, you’ll be selling blind without really knowing why you are selling at all.

Now what

Now mind you, I’m not saying don’t sell at all — because as it turns out, we do have some hard information on China and its for-profit education companies (and we’re due to get even more in a few weeks), and that data is worth factoring into your calculations. Specifically, on Feb. 28, one of these three for-profit educators — Gaotu — reported its financial results for 2022.

And the numbers were not great.

Gaotu reported a 50% drop in Q4 revenues and a 62% decline in revenues for the year to 2.498 billion yuan (about $360 million). It earned a tiny profit for the year despite the revenue decline — 13.2 million yuan (about $1.9 million). But its Q4 income was 70.6 million yuan (about $10.3 million) — a 75% decline from Q4 2021. And that result was even worse than it sounds because Gaotu’s Q4 profits came in 25% below expectations.

What does Gaotu’s news portend for its peers, New Oriental and TAL? The news here is both good and bad. On the good side, Gaotu CEO Larry Xiangdong Chen called his company’s performance “decent,” and pointed out that revenues at the education operator have risen — sequentially — for three consecutive quarters, that revenues are expected to grow at least another 9% in Q1 2023, and that the company is profitable now.

That’s good news for Gaotu — especially considering that both New Oriental and TAL were, at last report, unprofitable, losing $245 million and $204 million, respectively, over the last 12 reported months. That being said, the total income even for Gaotu in dollar terms was less than $2 million for the past year — not a lot of profit for a company valued at $1.1 billion.

The good news for New Oriental and TAL investors, meanwhile, is that (according to analysts, at least) both New Oriental and TAL are expected to join Gaotu in reporting profits next month — $0.33 per share and $0.02 per share, respectively. If that’s how things play out, then this could be a bad day to sell on a rumour.

Better to wait a few weeks, see what the facts are, and then make an informed decision.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends TAL Education. The Motley Fool has a disclosure policy.

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