AI Adoption And Offline Expansion Will Support Long Term Education Demand Narrative

Catalysts

About Gaotu Techedu

Gaotu Techedu is a technology driven education company providing online and offline learning services for students and adults across the full learning life cycle.

What are the underlying business or industry changes driving this perspective?

• Expansion of integrated online and offline learning centers, where offline revenue has already surpassed 10 percent of total revenues, may support higher pricing power and could help revenue growth and gross margin improve over time.
• Full stack adoption of AI across traffic acquisition, teaching delivery and internal operations is lowering marketing and operating expenses, which may help narrow operating losses and improve net margins.
• Rapid growth in nonacademic and adult learning services, including programming and college student offerings that are posting double digit revenue and high double digit profit growth, positions Gaotu to capture rising lifetime learning demand and potentially support continued top line expansion.
• Strengthening of the high quality teacher pipeline through university partnerships and AI enhanced training is likely to improve course quality and user satisfaction, which may support higher retention, referral driven enrollment and more stable revenue visibility.
• Healthy deferred revenue growth of over 23 percent and disciplined cost controls, combined with a strategic focus on profitability in 2026, point to the possibility of improving operating cash flow and a path toward sustainable earnings growth that may not yet be fully reflected in the valuation.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Gaotu Techedu's revenue will grow by 20.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from -6.4% today to 3.4% in 3 years time.
• Analysts expect earnings to reach CN¥350.1 million (and earnings per share of CN¥1.22) by about December 2028, up from CN¥-375.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥641.1 million in earnings, and the most bearish expecting CN¥248.3 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 20.7x on those 2028 earnings, up from -10.8x today. This future PE is greater than the current PE for the US Consumer Services industry at 16.7x.
• Analysts expect the number of shares outstanding to decline by 3.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.88%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Despite strong revenue growth and improved efficiency, Gaotu is still loss making with an operating loss margin of 11.3% and a net loss margin of 9.3%. If the shift in 2026 from growth to profitability leads to slower enrollment growth than expected or fails to close the loss gap, earnings and net margins may remain structurally weak.
• The strategy relies heavily on AI driven efficiency and integrated online offline models. If competing Edtech platforms or traditional education providers adopt similar or superior technology and hybrid formats, Gaotu could lose pricing power and differentiation, which would put pressure on long term revenue growth and gross margins.
• Regulatory and policy risks in the Chinese education sector remain a long term overhang. Any renewed tightening around online learning, nonacademic tutoring or cooperation with local governments and universities could constrain business lines that currently contribute more than 80 percent of revenues and materially impact revenue and earnings.
• The rapid build out of offline learning centers and new initiatives in nonacademic and adult learning requires sustained capital and operational discipline. If utilization rates or student retention in these newer segments fall short of expectations, the company may face rising fixed costs that weigh on operating leverage and net margins.
• Ongoing share repurchase programs totaling 180 million US dollars have reduced cash while operating cash flow is still negative. If deferred revenue growth slows or macroeconomic conditions weaken demand for discretionary education spending, liquidity headroom could tighten and constrain investment in growth drivers, which could hurt future revenue and earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $3.71 for Gaotu Techedu 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 $4.87, and the most bearish reporting a price target of just $1.96.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be CN¥10.2 billion, earnings will come to CN¥350.1 million, and it would be trading on a PE ratio of 20.7x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $2.38, the analyst price target of $3.71 is 35.9% 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.