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Is Youdao a Good Chinese Stock to Buy?

China-based internet technology company Youdao’s (DAO) shares have plunged in price amid strict regulations placed on the education industry by Chinese authorities in recent months. However, the company’s revenue grew across all its major segments in its last reported quarter. So, is it wise to buy the dip in the stock? Read on.

Headquartered in Hangzhou, China, Youdao, Inc. (DAO) is a leading intelligent learning company that develops and uses technologies to provide learning content, applications, and solutions for users of all ages. The stock was added to the MSCI China All Shares Small Cap Index on November 30. The company reported revenue growth across all major categories in the third quarter. However, the stock has declined 50.9% in price over the past six months and 28.3% over the past month to close yesterday’s trading session at $11.28.

It hit its all-time low of $7.02 on July 27, 2021, in part because that month the Chinese authorities stepped up restrictions on the education industry. China’s crackdown on Big Tech platforms and internet content continues. 

Furthermore, U.S.–China tensions will likely continue through 2022, impacting DAO. Also, because it could also soon dispose of its AST business amid increased regulations, its near-term prospects look.

Here is what could influence DAO’s performance in the near term:

Broad Product and Services Portfolio

DAO’s product portfolio includes online knowledge tools such as Youdao Dictionary and U-Dictionary, smart devices such as Youdao Smart Pen, and interactive learning apps such as Youdao Math. In addition, its online courses offerings include Youdao Premium Courses and China University MOOC. And on November 5, NetEase Cloud Classroom, a DAO-operated platform, announced that it introduced roughly 100 free-to-use digital training courses offered by Amazon Web Services.

Mixed Financials

For the third quarter, ended September 30, 2021, DAO’s total revenues increased 54.8% year-over-year to $215.30 million. Its revenues from learning services increased 65.9% year-over-year to $154.54 million, while its revenues from learning products came in at $39.50 million, up 56% year-over-year. Also, its revenue from online marketing services increased 3.4% year-over-year to $21.27 million.

However, its gross billings decreased 33.9% year-over-year to $98 million, and the gross billings of Youdao Premium Courses declined 34.6% year-over-year to $89 million. Also, its net loss came in at $20 million versus $137.74 million in the prior-year period.

Disposal of Academic AST Business

As part of its efforts to comply with applicable PRC regulatory requirements, DAO is expected to dispose of its after-school tutoring services for academic subjects included in China’s compulsory education system (the Academic AST Business). The transaction is likely to be completed by the end of 2021. However, DAO did not provide any assurance regarding the ultimate timing of the proposed transaction or that the transaction would even be completed. DAO’s Academic AST Business revenues accounted for roughly 25% of its total revenues in the third quarter. So, the disposal of the business could harm its revenue.

Unfavorable Analyst Estimates

Analysts expect DAO’s revenue to decrease 6.1% for the current quarter. ending December 31, 2021, and 16.5% for the quarter ending March 31, 2022. Its revenue is expected to decline 11.9% year-over-year to $707.24 million in fiscal 2022. In addition, its EPS is expected to remain negative in fiscal 2021 and 2022.

POWR Ratings Reflect Uncertain Near-Term Prospects

DAO has an overall C rating, which equates to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. DAO has a C grade for Value, which is in sync with its 1.66x and 1.86x respective forward EV/S and P/S, which are higher than the 1.37x and 1.16x industry averages.

The stock has a C grade for Quality, which is consistent with its negative trailing-12-month EBITDA margin, which is lower than the 12.80% industry average. Furthermore, it has a D grade for Momentum, which is in sync with its 20.9% loss over the past month and 54% loss over the past year.

DAO is ranked #27 out of 53 stocks in the F-rated China group. Beyond what I have stated above, we have also given the stock grades for Growth, Stability, and Sentiment. Get all the DAO ratings here.

Bottom Line

DAO’s shares hit their 52-week high of $42.17 on January 27, 2021, but have declined considerably since. They are currently trading below their  50-day and 200-day moving averages of $13.31 and $18.13, respectively, indicating a downtrend. Also, the stock could continue declining in the near term because the disposition of its AST business could harm its revenue growth prospects. So, we think it could be wise to wait before scooping up its shares. 

How Does Youdao (DAO) Stack Up Against its Peers?

While DAO has an overall POWR Rating of C, one might want to consider investing in A-rated (Strong Buy) stocks in the China group, such as NetEase, Inc. (NTES) and Fuwei Films (Holdings) Co., Ltd. (FFHL).

DAO shares were unchanged in premarket trading Thursday. Year-to-date, DAO has declined -57.48%, versus a 26.76% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.


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