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On Tuesday, Morgan Stanley (NYSE:MS) issued a downgrade for New Oriental Education (NYSE:EDU) stock, moving from an Overweight to an Equalweight rating and setting a new price target at $52.00. The shift in rating was prompted by concerns regarding the company's weaker-than-expected third-quarter fiscal year 2025 (3QF25) guidance and a downward revision of its full fiscal year 2025 (F25) outlook. According to InvestingPro data, the stock is currently trading near its 52-week low, despite maintaining impressive gross margins of 53% and strong revenue growth of 39% over the last twelve months.
The downgrade reflects Morgan Stanley's apprehension about the potential impact of a challenging macroeconomic environment on New Oriental Education's performance. The analysts at Morgan Stanley noted increasing uncertainties looking ahead into the third quarter of fiscal year 2025 and beyond. However, InvestingPro's analysis indicates the company maintains a strong financial health score, with more cash than debt on its balance sheet and sufficient liquidity to cover short-term obligations.
The revised price target of $52.00 comes as a direct response to the anticipated headwinds and the perceived fair value of the education company's stock in light of these new projections. The analysts observed that the revised price target aligns with their current assessment of the stock's value.
The analysts' commentary highlighted the impact of the weak macro environment as being more severe than previously expected, which has led to a less optimistic forecast for New Oriental Education's financial performance.
Morgan Stanley's evaluation concluded that with the current market conditions and the revised financial outlook, New Oriental Education's stock is now deemed to be fairly valued, prompting the change to an Equalweight rating. This adjustment by Morgan Stanley suggests a neutral stance on the stock, indicating that the firm believes the stock is now priced appropriately relative to its peers and the broader market. Notably, InvestingPro's Fair Value analysis suggests the stock may be undervalued at current levels. Subscribers can access 8 additional ProTips and a comprehensive Pro Research Report for deeper insights into EDU's valuation and growth prospects.
In other recent news, New Oriental Education demonstrated robust financial performance despite a few setbacks. The company's recent quarterly results surpassed revenue projections with a significant year-over-year increase of 31% in core revenue, exceeding the anticipated range of 25-28%. However, the outlook for the upcoming quarter's core revenue growth stands at a more subdued 18-21%.
Analyst firms BofA Securities and Jefferies have adjusted their financial outlook for the company. BofA Securities reduced the stock's price target from $82.90 to $68.60, while Jefferies revised its price target to $73.00 from the previous $93.00. Despite these adjustments, both firms maintain a Buy rating, indicating their belief in the company's potential value.
New Oriental Education's adjusted earnings per American depositary share for the recent fiscal second quarter was $0.22, missing the consensus estimate of $0.32. Meanwhile, the company's revenue rose 19.4% year-over-year to $1.04 billion, slightly exceeding the expected $1.03 billion.
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