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Why Youdao Stock Was Gaining Today

By Jeremy Bowman - Feb 25, 2021 at 2:37PM

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A blowout earnings report lifted shares of the Chinese online school.

What happened

Shares of Youdao (DAO -5.85%), a Chinese online education specialist, were rising on Thursday after the company delivered  better-than-expected results in its fourth-quarter earnings report.

As of 1:41 p.m. EST today, the stock was up 9.6% even as tech stocks were broadly crashing.

A boy sitting at a table with an open computer.

Image source: Getty Images.

So what

Youdao operates in the fast-growing online education segment and has enjoyed tailwinds from the pandemic over the last year, which has driven a shift to online learning in China and elsewhere.

Those effects were on display in the latest report as revenue skyrocketed 170% to $169.6 million, ahead of estimates at $161.6 million. Gross billings more than tripled in the quarter, and gross billings of premium products were up nearly 270%, indicating that its highest-margin products are its most successful.

K-12 enrollments increased 309% over the last year to 659,000, showing the shift to childhood online learning.

While the company continued to operate at a loss, it saw a sharp increase in gross margin from 29.8% to 47.5% as it benefited from economies of scale and the optimization of its teacher compensation structure. But the company ramped up spending on sales and marketing to take advantage of the opportunity from the pandemic, and it finished with an operating loss of $69.4 million. That was wider than the year before, but its operating-loss margin narrowed from 49.7% to 40.9%. On the bottom line, it reported an adjusted per-share loss of $0.58, better than expectations for a loss of $0.70 per share.

CEO Feng Zhou said: "2020 was a banner year for Youdao. We made great financial and operational strides across our business, closing the year with excellent top-line growth and positive operating cash flow in Q1, Q2, and Q4."

Now what

Management didn't provide guidance in the press release, but Zhou noted that retention is strong and said that the company plans a number of upgrades to its products and the business this year. Those sound like positives for 2021, though the growth rate is likely to moderate.

While the stock looks cheap, investors should be aware that the industry is highly competitive, and at least two Chinese online schools have been accused of fraud. The stock is risky, but with triple-digit top-line growth, the upside looks greater than the downside.

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