What happened
Shares of Chinese distance-education company GSX Techedu (GOTU -1.41%) were hammered on Friday after it reported earnings for the third quarter of 2020. In recent weeks, the stock has been in free fall. Today, it was down 20% as of 11:15 a.m. EST. And including today's drop, it's down nearly 60% from its highs.
So what
In GSX Techedu's press release, it highlighted net revenue of 1.966 billion yuan (about $300 million). This represents phenomenal 253% year-over-year growth. Paid course enrollments were up 134% from last year. Those top-line numbers look great. But the stock is down because of the bottom-line results.
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GSX Techedu reported a net loss of 933 million yuan (about $142 million). This enormous loss is stunning compared to its modest profit last year. Looking through the company's statement of operations, there are several expenses that have soared in the past year. The company's gross profit margin fell from around 28% to around 26%, but more troubling, selling expenses sextupled from the prior-year period.
Now what
To be clear, these were unaudited results, and that's why investors are jumpy. The company has been accused of fraud and is under investigation by the Securities and Exchange Commission. In today's press release, management said it's cooperating and doesn't believe an ongoing third-party review will find anything substantial. But investors find it fishy that the company's expenses happen to be soaring right as it's starting to get scrutinized.
I don't have a vested interest or an insider perspective either way with this international stock. Therefore, I would refrain from choosing a side and just take the numbers at face value. As reported, is this a stock I'd be interested in buying and holding for the long term? For me, the answer's "no." Investigation aside, the soaring expenses don't give me enough confidence on the potential future return.
