An increase in instructors and tutors coupled with higher costs of learning materials and marketing drove Gaotu Techedu (NYSE:GOTU) to a loss in Q2 of RMB1.65 per share ($0.23) compared to a profit of RMB21 per share in the same quarter last year, missing the consensus estimate by $0.02 per share.
With operating expenses up 144.2% and cost of revenue increasing by 70%, the loss comes despite a 43.6% increase in revenue and 87.4% improvement in gross billings. Ultimately, the higher costs lowered the company’s adjusted gross profit margin by 530 basis points to 69.0%.
The results underscore Gaotu Techedu’s (GOTU) struggle to manage aggressive expansion with financial viability, leading Citigroup to double-downgrade the Chinese online educator to Sell from Buy, warning investors of the company’s “deteriorating risk-reward profile amid escalating profitability concerns.”
Citigroup’s Alice Cai also slashed her target price on the company almost in half to $2.94 and “materially” lower its bottom-line estimates for FY24, FY25, and FY26 by 125%, 149% and 234%, respectively.
Last January, Cai upgraded the company to Buy from Sell after an adverse event at a rival platform fueled momentum in membership for Gaotu Techedu (GOTU).
The event encouraged the company to rapidly enhance its workforce in the first half of the year and establish a “robust” recruitment system, CEO Larry Chen said on the company’s earnings call. Unfortunately, the expansion weighed on profits.
The combination of Q2 loss, Citigroup downgrade and Cai’s warning about the company’s ability to earn a profit drove Gaotu Techedu (GOTU) shares down as much as 20% to a 7-month low.
