Youdao(US:DAO)2024-03-06 16:00Investment Rating - The report assigns a "Buy" rating for the company, Youdao (DAO US), with a target price of $5.30, indicating a potential upside of 21.6% from the current price of $4.36 [4][10]. Core Insights - The company's business health has improved, leading to better-than-expected profits. In Q4 2023, total revenue increased by 2% year-on-year to 1.48 billion RMB, surpassing market expectations [1][2]. - The growth in revenue was primarily driven by the advertising business, which saw a significant increase of 97% year-on-year, while learning services and smart hardware revenues declined by 3% and 45%, respectively [1]. - The adjusted net profit reached 69 million RMB, doubling from the previous year, as the company focused on improving business health and profitability [1][2]. Summary by Sections Financial Performance - In Q4 2023, total revenue was 1.48 billion RMB, with a year-on-year growth of 2%. The revenue breakdown showed learning services at 784 million RMB, smart hardware at 222 million RMB, and advertising at 474 million RMB [1][6]. - The gross margin decreased by 3 percentage points year-on-year, primarily due to a decline in the proportion of learning services [1][6]. - The company expects total revenue in Q1 2024 to grow by 16% year-on-year, with learning services, hardware, and advertising projected to increase by 10%, 10%, and 45%, respectively [1][7]. Revenue Forecast - The revenue forecast for 2024 estimates total revenue to reach 6.32 billion RMB, reflecting a year-on-year growth of 17.2% [3][11]. - The company anticipates high school education revenue to grow by 25-30% in 2024, driven by strong demand and quality supply [2][3]. Valuation Adjustments - The report adjusts revenue expectations for high school and advertising upwards while lowering forecasts for literacy and hardware. The target price remains at $5.30, with a valuation method that excludes the impact of literacy business [2][3]. - The valuation for the high school business is set at 15 times the 2024 earnings, which is below the online education sector average of 20 times due to lower growth expectations compared to peers [2].