Youdao: Expecting A Better Year Ahead

Core Viewpoint - Youdao, Inc. is expected to perform better in 2024 compared to 2023, with a favorable outlook not fully reflected in its valuations, maintaining a Buy rating for the stock [3]. Revenue Growth Expectations - Youdao's revenue for fiscal 2023 increased by 8% to RMB5,389 million, aligning closely with market expectations of RMB5,393 million [4]. - The online marketing services business is a key growth driver, with revenue surging by 98% to RMB1,332 million, attributed to rising demand for performance-based advertisements, particularly in gaming, entertainment, sports, and O2O sectors [4]. - The company is exploring new growth opportunities in the gaming industry and has become an authorized advertising agency for TikTok, indicating potential for overseas expansion in online marketing services [4]. - The smart devices business, which includes products like the Youdao Dictionary Pen and Smart Learning Pad, saw a revenue decline of 28% to RMB909 million in 2023, but is expected to return to growth following sales channel optimization [4]. Profitability and Loss Reduction - Youdao's net loss decreased from RMB640 million in FY 2022 to RMB475 million in FY 2023, with expectations for further narrowing of losses in FY 2024 [5]. - Improvements in the smart devices business profitability are anticipated due to a shift to a more online-focused sales approach, which should yield better returns [5]. - Increased utilization of AI in learning services is expected to enhance gross margins, as it allows for greater productivity among teachers [5]. Valuation Insights - Analysts project Youdao's revenue growth to improve from 7.5% in 2023 to 14.8% in 2024, with net loss expected to contract to RMB93 million [6]. - The market values Youdao at a price-to-sales multiple of 0.57 times and a free cash flow yield of 7.3%, indicating attractive valuations given the low price-to-revenue ratio and high cash flow yield [6].