We found a bullish thesis on New Oriental Education & Technology Group Inc. (EDU) on Substack by East Asia Stock Insights. In this article, we summarize the bullish thesis on EDU. New Oriental Education & Technology Group Inc. (EDU) shares were trading at $60.31 as of September 18th.
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New Oriental Education and Technology Group (EDU) represents an attractive investment opportunity after successfully recovering from the severe disruptions caused by China’s 2021 “double cut” policy, which effectively eliminated for-profit K9 academic instruction. The policy caused EDU’s stock price to fall dramatically by 95%, from a peak of $196 per share in February 2021 to a low of $10 in March 2022. Despite these challenges, EDU has demonstrated remarkable resilience by pivoting to non-academic instruction, intelligent learning systems, e-commerce and tourism, revitalizing its business model and igniting growth. While the company’s revenue has recovered to its 2020 peak levels in 2023, its stock price remains roughly 30% below its previous peak, suggesting that it is significantly undervalued relative to its new growth trajectory.
EDU’s strategic shift into non-academic tutoring has proven particularly advantageous. The post-regulatory situation has reduced competition in K12 academic tutoring, creating a favorable environment for EDU’s high school business and non-academic services. In addition, increased demand for overseas education and test preparation has further fueled EDU’s growth, with overseas test preparation services and consulting seeing impressive acceleration. The company’s diversified business model, which includes non-academic tutoring, high school education, overseas test preparation, consulting, and e-commerce, contributes equally across segments, providing stability and reducing risk from a single business line. This diversification creates synergies across the various segments, increasing overall growth potential.
Despite the initial negative impact of regulatory changes, EDU’s strong entrepreneurial spirit and innovative approach have strengthened the company’s competitive position in the non-academic sector. Regulatory sentiment has also improved, with outlooks for education services turning from neutral to positive, supporting the company’s growth prospects. Additionally, EDU’s strong balance sheet with $4.95 billion in cash and minimal debt underscores the company’s financial stability and ability to weather economic fluctuations.
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EDU’s current valuation of 27x 2024 net income may seem high, but is reasonable given the company’s expected revenue CAGR of 20% and profit CAGR of over 30% over the next five years, excluding 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 significant upside potential if its growth trajectory continues to exceed market expectations.
New Oriental Education & Technology Group Inc. also doesn’t make it into our list of the 31 most popular stocks among hedge funds. According to our database, 37 hedge fund portfolios held EDU at the end of the second quarter, up from 42 in the previous quarter. While we recognize the risks and potential of EDU as an investment, we believe some AI stocks have the potential to deliver higher returns in a shorter time frame. If you’re looking for AI stocks that are more promising than EDU but are trading at less than five times EDU’s price, check out our report on the cheapest AI stocks.
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Disclosures: None. This article was originally published on Insider Monkey.
