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Why GSX Techedu Is Tumbling 17% Today

By Rich Duprey – Sep 2, 2020 at 10:02AM

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The online education company is another Chinese small-cap stock caught up in an alleged accounting scandal.

What happened

Shares of GSX Techedu (GOTU 5.17%) were tumbling almost 17% in morning trading Wednesday after the education company confirmed it was part of an SEC investigation into whether it had inflated its sales and user accounts. It also reported second-quarter earnings.

So what

The Chinese online education company reported that revenue more than quadrupled in the quarter to 1.65 billion renminbi (about $233 million) as enrollment in its K-12 online course increased more than 300% year over year. But investors might be taking those numbers with a grain of salt after it disclosed it was cooperating with an SEC investigation into its finances going all the way back to 2017.

Girl sitting in front of laptop

Image source: Getty Images.

Now what

Short-sellers have been targeting GSX for a good part of the year, contending its claim of being able to acquire customers more cheaply than its competitors is due to the Chinese company using shell companies to hide expenses. They also claim most of its customers are fake.

Several Chinese stocks have been caught up in similar accounting scandals, including Luckin Coffee and iQiyi, the video streaming unit of Chinese search giant Baidu.

GSX Techedu says it has launched its own internal investigation, but investors might not put any stock into its findings when results are eventually released.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Baidu and Luckin Coffee Inc. The Motley Fool recommends iQiyi. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Gaotu Techedu Inc. Stock Quote
Gaotu Techedu Inc.
$1.22 (5.17%) $0.06
Baidu, Inc. Stock Quote
Baidu, Inc.
$119.47 (0.61%) $0.72
iQIYI, Inc. Stock Quote
iQIYI, Inc.
$2.88 (-3.03%) $0.09
Luckin Coffee Inc. Stock Quote
Luckin Coffee Inc.
$16.02 (-0.71%) $0.12

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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