What happened
Shares of Chinese education company GSX Techedu (GSX +1.59%) just keep climbing higher, and reached all-time highs on Thursday. The company has been berated with fraud allegations over the past few months, but the stock continues rising all the same.
On May 19, GSX Techedu management began to publicly counter the accusations made against it. Since then, the stock has nearly doubled. And since the company went public last year, its stock is up over 500%, demolishing the S&P 500 over that time.
So what
Frankly, I don't know why the stock is rising today. Other Chinese growth stocks are also flying higher today, including Baozun, Pinduoduo, and Qutoutiao. So perhaps GSX Techedu stock is just running with the pack. But don't blame Robinhood investors for the stock's upward move. The number of Robinhood users holding GSX Techedu stock has been going down since mid-June, according to data from Robintrack.
Zooming out to look at the bigger picture, today's move is surprising. Prominent research firms have released detailed reports on why they believe GSX Techedu is a fraud, legislators are considering new rules for foreign companies listing on U.S. exchanges, short interest is increasing, and despite nearly tripling in value over the last six months, GSX Techedu stock popped another 12% today with zero news.
Image source: Getty Images.
Now what
For these reasons, I believe investors should question whether the reward in GSX Techedu stock is worth the risk at this point. Assuming its numbers are accurate, it's generated around $445 million in trailing-12-month revenue. Given its market capitalization of $15.2 billion, the stock trades at 34 times trailing sales. Granted, revenue is growing at a triple-digit pace, so it does deserve at least some premium valuation.
Nevertheless, that's a high price to pay for a company, even if the business is entirely legitimate. And there's a chance (no matter how slim) it might be inflating its numbers. Therefore, I'm not sure the potential reward is worth the present risk in GSX Techedu stock, especially when there's other stocks offering growth and value.
