Tutoring And AI Rollout Will Broaden Market Access

Key Takeaways

• New ventures and diversified revenue streams show strong growth potential, enhancing market penetration and overall earnings.
  
• AI investments aim to boost operational efficiency and margins, with significant capital allocation reflecting management's confidence.
  
• Rising expenses and competitive pressures could strain margins and constrain revenue growth across both overseas business and the learning hardware market.

Catalysts

New Oriental Education & Technology Group Inc.

• New Oriental's new ventures, excluding East Buy, have shown strong revenue growth, increasing by 21.2% year-over-year, indicating potential for future revenue expansion.
  
• The nonacademic tutoring business and intelligent learning systems have been rolled out to around 60 cities, with significant contributions from high-tier cities. This expansion is expected to enhance market penetration and revenue growth.
  
• The integration and investment in AI technologies are designed to improve operational efficiencies and student outcomes, potentially boosting operating margins by reducing costs and enhancing the scalability of educational services.
  
• The company's integrated tourism-related business line has demonstrated significant growth, with an 85% revenue increase year-over-year. This suggests broadening revenue streams and diversification, which could positively impact overall earnings.
  
• The share repurchase program, increased to $700 million, signals management's confidence in the company's undervaluation and future financial health, potentially supporting earnings per share (EPS) growth.

New Oriental Education & Technology Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming New Oriental Education & Technology Group's revenue will grow by 12.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.1% today to 9.6% in 3 years time.
• Analysts expect earnings to reach $660.8 million (and earnings per share of $3.97) by about April 2028, up from $391.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $881 million in earnings, and the most bearish expecting $503 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.1x on those 2028 earnings, up from 18.5x today. This future PE is greater than the current PE for the US Consumer Services industry at 18.7x.
• Analysts expect the number of shares outstanding to decline by 0.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.44%, as per the Simply Wall St company report.

New Oriental Education & Technology Group Future Earnings Per Share Growth

Risks

• There is a slowdown in the growth of overseas-related business due to macroeconomic conditions and changes in international relations, which could impact revenue growth.
  
• Rising selling and marketing expenses, which increased by 13% year-over-year, could pressure net margins if not controlled effectively.
  
• Increased general and administrative expenses, which rose by 19.8% year-over-year, may negatively affect the company's operating income if not managed properly.
  
• Constraints on growth in the K-9 offline enrollment as compared to learning devices, which grew significantly faster, could impact the balanced revenue mix between hardware and service-oriented revenue.
  
• Competitive pressure in the learning hardware market, with competitors launching cheaper models, could constrain pricing power and affect revenues from this line of business.

Valuation

• The analysts have a consensus price target of $63.065 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 $93.7, and the most bearish reporting a price target of just $41.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $6.9 billion, earnings will come to $660.8 million, and it would be trading on a PE ratio of 19.1x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $44.39, the analyst price target of $63.07 is 29.6% 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.