On Thursday, Citi issued a new rating for Youdao (NYSE:DAO) shares, shifting its stance from Buy to Neutral, while increasing the price target to $8.10 from the previous $7.00.
The adjustment follows a remarkable rally in Youdao’s share price, with InvestingPro data showing a 100% surge over the past six months and an 84.77% year-to-date return. The company’s success stems from advertising growth, particularly in new verticals, robust real-time auction (RTA) revenue growth, and the application of artificial intelligence technologies.
The company also demonstrated improved earnings in the third quarter of 2024, achieving a robust gross profit margin of 49.36% and operational expenditure optimization. According to InvestingPro data, Youdao maintains a moderate debt level while delivering 7.53% revenue growth over the last twelve months. These factors are considered positives by the financial firm.
Moreover, the potential for continued healthy growth in smart devices, spurred by the rollout of new products, was acknowledged.
Despite these advancements, Citi anticipates that the momentum in learning services may be subdued due to more conservative marketing expenditures. Consequently, Citi has adjusted its revenue estimates for 2024, 2025, and 2026 to reflect strong performance in advertising but slower growth in learning services. The price target has been raised to $8.10, transitioning to 2025 estimates.
Citi commended Youdao’s progress in its advertising business and margin improvement. However, the firm suggests that the stock’s recent strong performance may mean that the positives are already reflected in the current valuation, prompting the downgrade to Neutral.
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