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Why GSX Techedu Stock Crashed Today

By Rich Smith - Jun 11, 2021 at 4:39PM

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Citi spins on a dime and downgrades to sell.

What happened

Shares of Chinese online after-school tutoring stock Gaotu Techedu (GOTU -0.94%), which changed its name from "GSX Techedu" last week, closed down 9% on Friday after investment bank Citigroup downgraded the stock all the way from buy to sell.

So what

According to Citi, Chinese news site Xinhua Net quoted Chinese President Xi Jinping commenting that "students should not rely for their studies on after-school tutoring."

And given that after-school tutoring is basically Gaotu Techedu's entire business model, you can understand why that comment kind of cut the stock to the quick.

Chinese flag superimposed on a stock market chart

Image source: Getty Images.

Now what

The next steps, warns Citi in a note covered today on TheFly.com, could be for Chinese regulators to impose controls on "excessive capitalization," put caps on pricing, ban advertising of tutoring services, and perhaps even restrict tutoring sessions to weekends and holidays.

It's that last possibility that worries me most: If tutoring becomes off limits on weekdays, that would immediately cut the potential revenue Gaotu could collect in a week by more than 70%.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Gaotu Techedu Inc. Stock Quote
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