China's Rising Middle Class And AI Will Revolutionize Education

Key Takeaways

• Continued rollout in new cities and technology-driven personalized offerings position the company for revenue growth beyond current expectations.
  
• Untapped financial resources enable strategic expansion, M&A, and innovation, supporting long-term profitability and market leadership.
  
• Shifting demographics, rising regulatory and technological challenges, and intensifying competition threaten sustainable growth and profit margins across core and diversified business lines.

Catalysts

New Oriental Education & Technology Group Inc.

• While analyst consensus points to strong growth in new ventures and nonacademic tutoring, these projections likely understate the long-term revenue upside: with 20 percent sustained annual growth expected in the K-9 segment and further rollout potential across tier-2 and tier-3 cities, actual revenue growth could materially exceed consensus, especially as New Oriental leverages its brand and distribution to capture a far larger share of China's evolving education market.
  
• Analysts broadly believe that robust investments in AI and technology will improve margins, but this underappreciates the compounding margin expansion possible as proprietary AI-enabled products, automation, and the scalable OMO (online-merge-offline) platforms increasingly reduce costs at scale, enabling both higher net margins and premium ARPU growth driven by personalized, technology-enhanced offerings.
  
• New Oriental's strong balance sheet-showing over $4.9 billion in cash, deposits, and short-term investments-presents highly underutilized financial flexibility for accelerated M&A, major technology investments, or faster learning center expansion, all of which could rapidly enhance both top-line growth and longer-term profitability.
  
• The rising aspirations and increased disposable income of China's middle class, coupled with a continued shift toward premium and lifelong learning services, position New Oriental to aggressively grow its adult, college, and language-upskilling businesses, unlocking entirely new recurring revenue streams beyond the traditional academic segments.
  
• As Chinese parents and students increasingly seek international education and language proficiency amid globalization, New Oriental's leadership in overseas test prep and global study tour offerings puts it at the forefront of long-term industry trends, supporting outsized revenue and earnings growth as student mobility and international demand continue to expand regardless of short-term macro or policy noise.

New Oriental Education & Technology Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on New Oriental Education & Technology Group compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming New Oriental Education & Technology Group's revenue will grow by 14.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 7.6% today to 10.9% in 3 years time.
• The bullish analysts expect earnings to reach $809.6 million (and earnings per share of $5.38) by about August 2028, up from $371.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 17.3x on those 2028 earnings, down from 20.7x today. This future PE is lower than the current PE for the US Consumer Services industry at 19.9x.
• Analysts expect the number of shares outstanding to decline by 3.68% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.84%, as per the Simply Wall St company report.

New Oriental Education & Technology Group Future Earnings Per Share Growth

Risks

• China's shrinking youth population and declining birth rates are likely to erode the long-term addressable market for K-12 and test preparation services, restricting New Oriental's ability to sustain meaningful revenue growth as the overall pool of students declines.
  
• The company's heavy investments in physical learning centers could become a structural disadvantage as consumer demand shifts toward tech-enabled, asset-light, and AI-driven educational models, potentially resulting in higher fixed costs and pressure on net margins.
  
• Persistent regulatory unpredictability and compliance obligations in China's private education sector may require ongoing adjustments, increase compliance-related expenses, and limit operational flexibility, all posing risks to profit margins and future earnings.
  
• Slower growth, notably in overseas test prep and non-academic business lines due to changes in the economic environment and international relations, highlights susceptibility to external shocks, possibly resulting in revenue volatility and reduced earnings potential if macro challenges persist or worsen.
  
• Intensifying competition from edtech startups and rapid technological disruptions may outpace New Oriental's diversification efforts-despite recent AI investments-which risks eroding market share and compressing revenue in its core and emerging businesses.

Valuation

• The assumed bullish price target for New Oriental Education & Technology Group is $76.58, which represents two standard deviations above the consensus price target of $57.61. This valuation is based on what can be assumed as the expectations of New Oriental Education & Technology Group's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $78.6, and the most bearish reporting a price target of just $37.8.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $7.4 billion, earnings will come to $809.6 million, and it would be trading on a PE ratio of 17.3x, assuming you use a discount rate of 7.8%.
• Given the current share price of $46.96, the bullish analyst price target of $76.58 is 38.7% 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.