AI Investments And Non-Academic Tutoring To Drive Future Operational Efficiencies

Key Takeaways

• Growth in non-academic tutoring and intelligent learning systems is expected to significantly drive future revenue and earnings increases.
  
• Strategic investments in AI and new technologies could enhance operational efficiencies and positively impact net margins through cost reduction and improved services.
  
• Expansion and diversification may strain profitability due to operational costs, tourism losses, seasonal pressures, market competition, and integration risks.

Catalysts

New Oriental Education & Technology Group Inc.

• New Oriental has experienced significant growth in new educational initiatives, including non-academic tutoring and intelligent learning systems, which are growing rapidly and are expected to drive future revenue increases.
  
• The launch and expansion of tourism-related business lines, including study tours and research camps, recorded a substantial 221% revenue growth, suggesting material contributions to revenue and earnings in upcoming periods.
  
• New Oriental’s increased investments in technology, such as AI and ChatGPT, to enhance their education services could potentially improve operational efficiencies and positively impact net margins through reduced costs and enhanced service offerings.
  
• The ongoing share repurchase program, with an authorization to buy back up to $700 million worth of stocks, is expected to enhance shareholder value and increase earnings per share (EPS) over time.
  
• Expansion of capacity and learning centers by 20-25% in strategic locations with strong performance prospects indicates potential top-line revenue growth and profitability improvements as new centers mature and achieve full utilization.

New Oriental Education & Technology Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming New Oriental Education & Technology Group's revenue will grow by 17.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.4% today to 10.2% in 3 years time.
• Analysts expect earnings to reach $767.0 million (and earnings per share of $4.57) by about December 2027, up from $389.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.0 billion in earnings, and the most bearish expecting $607 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.2x on those 2027 earnings, down from 24.9x today. This future PE is greater than the current PE for the US Consumer Services industry at 19.7x.
• Analysts expect the number of shares outstanding to grow by 0.87% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.18%, as per the Simply Wall St company report.

New Oriental Education & Technology Group Future Earnings Per Share Growth

Risks

• The rapid expansion in capacity and learning centers could lead to increased operational costs and may not be immediately matched by revenue growth, impacting net margins in the short term.
  
• While there's growth in the tourism business, it is expected to be loss-making for the whole year, which could negatively impact overall earnings and profitability.
  
• The company anticipates margin pressure in Q2 due to seasonality and additional marketing expenses, suggesting potential challenges in maintaining profitability during off-peak times.
  
• Increased competition and regulatory measures in the Chinese education sector could pose risks to revenue and market share, affecting long-term financial stability.
  
• The integration of East Buy and reliance on its performance for revenue could introduce vulnerability due to its diversified business model and potential market fluctuations.

Valuation

• The analysts have a consensus price target of $86.4 for New Oriental Education & Technology Group 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 $109.5, and the most bearish reporting a price target of just $62.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $7.5 billion, earnings will come to $767.0 million, and it would be trading on a PE ratio of 23.2x, assuming you use a discount rate of 7.2%.
• Given the current share price of $59.32, the analyst's price target of $86.4 is 31.3% higher.
• 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.