We came across a bullish thesis on New Oriental Education & Technology Group Inc. (EDU) on East Asia Stock Insights’ Substack by East Asia Stock Insights. In this article we will summarize the bulls’ thesis on EDU. New Oriental Education & Technology Group Inc. (EDU) share was trading at $60.31 as of Sept 18th.
A student concentrate on their laptop in the library, taking advantage of an educational program online.
New Oriental Education & Technology Group (EDU) represents a compelling investment opportunity following its successful turnaround from the severe disruptions caused by China’s 2021 “double-reduction” policy, which effectively eliminated for-profit K9 academic tutoring. This policy led to a dramatic 95% drop in EDU’s stock price from a peak of $196 per share in February 2021 to a low of $10 in March 2022. Despite these challenges, EDU demonstrated remarkable resilience by pivoting towards non-academic tutoring, intelligent learning systems, e-commerce, and tourism, which rejuvenated its business model and ignited growth. The company’s revenue rebounded to its 2020 peak levels in 2023, yet its stock remains approximately 30% below its prior peak, suggesting significant undervaluation relative to its renewed growth trajectory.
EDU’s strategic shift to non-academic tutoring has proven particularly advantageous. The post-regulation landscape has diminished competition in K12 academic tutoring, creating a favorable environment for EDU’s high school business and non-academic offerings. Additionally, the rise in demand for overseas education and test preparation has further boosted EDU’s growth, with overseas test prep services and consulting showing impressive acceleration. The company’s diversified business model, which includes non-academic tutoring, high school education, overseas test prep, consulting, and e-commerce, contributes evenly across segments, providing stability and mitigating risks from any single business line. This diversification also creates synergies among its various segments, enhancing overall growth potential.
Despite the initial negative impact of regulatory changes, EDU’s strong entrepreneurial spirit and innovative approach have strengthened its competitive moat in the non-academic sector. The regulatory sentiment has also improved, with a more neutral-to-positive outlook on educational services, which supports the company’s growth prospects. Moreover, EDU’s robust balance sheet, with $4.95 billion in cash and negligible debt, underscores its financial stability and ability to weather economic fluctuations.
Although EDU’s current valuation at 27x 2024 net income may appear high, it is justified given the company’s anticipated 20% revenue CAGR and over 30% earnings CAGR over the next five years, excluding the East Buy. Using a sum-of-the-parts (SOTP) valuation approach, EDU’s fair value is estimated at $25.2 billion, equating to a target price of $153 per share. This represents a potential upside of approximately 142%, highlighting EDU as a promising investment with substantial upside potential if its growth trajectory continues to exceed market expectations.
New Oriental Education & Technology Group Inc. is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 37 hedge fund portfolios held EDU at the end of the second quarter which was 42 in the previous quarter. While we acknowledge the risk and potential of EDU as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than EDU but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.