What happened
The coronavirus is getting worse in China, and it's possible that investors believe that's a good thing for GSX Techedu (GOTU -7.59%). The company is a remote-education company in China, and its business grew substantially in 2020. And if COVID-19 gets worse in that country, it's possible 2021 will be another good year for this business. The stock finished Friday's session up 18%.
So what
According to The Associated Press, new coronavirus cases are causing the Chinese government to lock down two hospitals in Shanghai. Parts of Beijing are also locking down. The government is reportedly hoping to have 50 million people vaccinated over the next few weeks, a small fraction of the country's 1.4 billion population.
Image source: Getty Images.
Through the first three quarters of 2020, GSX Techedu reported year-over-year revenue growth of 316.5% in local currency. For the upcoming fourth quarter, management was guiding for revenue of 2.08 billion yuan to 2.12 billion yuan ($322 million to $328 million), which would be a quarter-over-quarter improvement.
But that would only be 122% to 126% year-over-year revenue growth -- still stellar but a big pullback from the growth rate it experienced in 2020, perhaps reflecting the return to normal in China as the pandemic seemed to be dying out.
However, it appears investors might expect GSX Techedu's services will be in greater demand if the pandemic worsens in China. This is further complicated by short interest in this stock. According to Yahoo! Finance, around half of the stock's float was sold short up until recently. If investors are buying shares over the last few days because of the news coming out of China, it could be causing a short squeeze, as short-sellers are forced to cover their bearish positions.
Whatever the reason, a GSX Techedu investment has crushed the market over the past year. GSX data by YCharts
Now what
Here's why so many shares of GSX Techedu are sold short to begin with: the company is under fire from many popular short-sellers, who claim GSX Techedu is a fraud.
And the company has indeed admitted that it is under investigation from the Securities and Exchange Commission (SEC). While that investigation is ongoing and it may turn out that everything is above board, this has caused a lot of people to actively bet against this stock.
The company faces the possibility of being delisted from major U.S. exchanges if the SEC finds wrongdoing. Therefore, it's important to approach a GSX Techedu investment fully aware of this risk.
