Gaotu Techedu: Profitability Concerns Overblown, Maintaining "Buy" Rating

Core Viewpoint - Gaotu Techedu's Q2 2024 earnings results showed strong revenue growth but significant adjusted net losses, leading to a market overreaction and a stock price decline, despite a maintained "buy" rating due to undervaluation and strong cash reserves [2][12]. Financial Performance - Net revenues increased by 43.6% year-over-year [3] - Gross billings increased by 87.4% year-over-year [3] - Non-GAAP net loss was RMB418 million, a 560% increase from the same period in 2023 [3] - Net operating cash inflow was RMB386.2 million, up 33.8% from RMB288.5 million in Q2 2023 [3] Cost Structure - Cost of revenues increased by 70.0% year-over-year, driven by workforce expansion and increased learning material costs [3] - Operating expenses rose by 144.2% to RMB1,161.1 million from RMB475.4 million in Q2 2023, primarily due to employee expansion and higher marketing expenditures [3] Market Outlook - Gaotu is preparing for strong future demand, as indicated by strategic investments in teacher recruitment and customer acquisition [4] - Non-academic tutoring business saw over 200% growth in gross billings, contributing more than 20% of total revenues for the first time [5] - Management guided for Q3 revenue growth of 50.5% to 53.0% [6] Balance Sheet and Share Repurchases - At the end of Q2, Gaotu had cash and cash equivalents totaling approximately RMB4,103 million (around $570-575 million) [8] - The company has an $80 million share repurchase authorization, with approximately $53 million remaining [8] Financial Projections and Valuation - Revenue projections for 2024 and 2025 have been increased based on management's guidance [9] - The company is applying a 1.2 times EV/Sales multiple to its 2025 estimated sales, indicating significant upside potential [11] Conclusion - Gaotu's strong revenue growth continues, but profitability is impacted by upfront spending for future demand [12] - The stock is considered undervalued with strong downside protection from its balance sheet and share repurchase program [12]