Future AI Integration Will Revolutionize Learning And Marketing Services

Key Takeaways

• The company's AI technology integration is enhancing user experiences, boosting customer retention, and improving profitability in learning services.
  
• Strategic AI-driven expansion into new markets and innovations in smart devices are driving revenue growth and ensuring long-term sustainability.
  
• Selective customer acquisition and market uncertainties pose challenges for revenue growth, profitability, and stability across learning services and marketing segments.

Catalysts

An internet technology company, provides online services in the fields of content, community, communication, and commerce in China.

• The integration of AI technologies, such as large language models and AI-driven subscription services, is expected to enhance user experience and drive future growth in learning services. This could significantly impact revenue and net margins by increasing customer retention and reducing costs associated with traditional learning methods.
  
• The positive financial turnaround, with the company achieving its first profitable third quarter and being on track for full year operational profitability, indicates improved efficiency and cost management. This improvement in net margins and operational income is a catalyst for future earnings growth.
  
• The expansion into new sectors and international markets in online marketing services, supported by AI optimizations, is driving revenue growth. The company anticipates continued high demand for AI tools advertising and overseas advertising, which would positively influence revenue and gross margins.
  
• Continued innovation in the Smart Devices segment, with a focus on AI integration in products like dictionary pens, is expected to sustain growth and improve profitability. The emphasis on high-margin products and new product launches could boost revenue and net income.
  
• A strategic focus on high-demand, high-ROI customer acquisition and services, especially in the learning services segment, is expected to result in healthier financials and long-term business sustainability, impacting revenue positively despite short-term fluctuations.

Youdao Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Youdao's revenue will grow by 9.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.0% today to 5.5% in 3 years time.
• Analysts expect earnings to reach CN¥413.6 million (and earnings per share of CN¥3.32) by about February 2028, up from CN¥55.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.1x on those 2028 earnings, down from 122.5x today. This future PE is lower than the current PE for the US Consumer Services industry at 19.8x.
• Analysts expect the number of shares outstanding to decline by 2.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.62%, as per the Simply Wall St company report.

Youdao Future Earnings Per Share Growth

Risks

• The learning services segment saw a 19.2% decrease in net revenues year-over-year due to a selective customer acquisition approach and reduced low-return investments, which could impact future revenue growth and market share.
  
• Gross profit decreased by 8.2% in the third quarter compared to the previous year, and the gross margin for learning services also declined, which may affect overall profitability and earnings.
  
• The smart devices segment experienced growth, but this is heavily reliant on product launches and market success, making future revenues susceptible to market trends and consumer preferences.
  
• The online marketing services segment, despite growth, faces challenges such as a high base from the previous year and macroeconomic uncertainties that could impact future growth potential and ad revenue stability.
  
• Despite improvements in operating income, challenges in scaling high ROI services and dependency on AI developments may result in uncertainties in maintaining profitability and achieving sustained earnings.

Valuation

• The analysts have a consensus price target of $7.349 for Youdao based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $9.99, and the most bearish reporting a price target of just $3.98.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥7.5 billion, earnings will come to CN¥413.6 million, and it would be trading on a PE ratio of 18.1x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $7.83, the analyst price target of $7.35 is 6.5% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.