Citi maintains Sell on Gaotu shares, price target at $1.94

On Monday, Citi reaffirmed its Sell rating on Gaotu Techedu (NYSE:GOTU) with a price target of $1.94, despite the stock’s impressive 65% year-to-date gain. According to InvestingPro data, GOTU’s RSI indicates overbought conditions, while analyst targets range from $1.95 to $4.80. The firm’s analyst, Alice Cai, adjusted revenue growth forecasts for the company, predicting increases of 28%, 25%, and 25% year-over-year for fiscal years 2025, 2026, and 2027 respectively. These projections represent a significant upward revision from Cai’s previous estimates, by 31%, 18%, and 12%. The company has demonstrated strong revenue momentum, with InvestingPro showing a 54% revenue growth in the last twelve months and an impressive 68% gross profit margin.

Despite the improved revenue outlook, Cai expressed concerns over Gaotu Techedu’s non-GAAP operating profit (OP) projections. The analyst’s estimates of RMB 589 million, RMB 558 million, and RMB 474 million for the respective fiscal years are substantially lower than the company’s guidance of approximately RMB 350 million. The discrepancy, according to Cai, arises from differences in lease accounting practices.

Cai explained that the management’s expectations of unchanged offline losses do not take into account the full impact of lease accounting. Specifically, leases signed in the second half of 2024 will result in full 12-month expenses for 2025, as opposed to only partial year expenses in 2024. This, Cai argues, will inevitably lead to an increase in year-over-year costs, regardless of any new business expansion.

The analyst indicated that a reassessment of Gaotu Techedu’s offline progress will be conducted around the summer vacation period, at which point the company’s forecasts may be reviewed. However, until then, the Sell rating remains in place, with the price target unchanged at $1.94. InvestingPro subscribers can access 12 additional key insights about GOTU, including detailed financial health scores and comprehensive valuation analysis through the Pro Research Report, helping investors make more informed decisions about this volatile education technology stock.

In other recent news, Gaotu Techedu Inc. reported its fourth-quarter financial results for 2024, revealing a significant earnings miss with an EPS of -$0.53, compared to the forecasted $0.12. Despite this, the company exceeded revenue expectations, reporting $1.38 billion against the anticipated $1.3 billion, marking an 82.5% increase year-over-year. Gaotu Techedu also improved its operating margin by 13.9 percentage points, though it still reported a loss from operations, which narrowed by 20.6%. The company’s gross billings rose by 69% year-over-year, reaching over $2.1 billion, while its net operating cash inflow was $783.6 million. Looking ahead, Gaotu Techedu anticipates achieving profitability at the net profit level in the first quarter of 2025, with projected revenue between $1.48 billion and $1.428 billion. The company continues to invest in AI technologies, which it aims to integrate into its educational services to enhance operational efficiencies and learning outcomes. Gaotu’s management has expressed confidence in improving profitability through these strategic initiatives, emphasizing the transformative role of AI in education.

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