GSX Techedu Inc. (NYSE:GSX) Heading for a Dip

GSX Techedu Inc. (NYSE:GSX) Heading for a Dip

GSX Techedu Inc. (NYSE:GSX) Heading for a Dip

GSX TECHEDU INC. is a China-based holding company principally involved in the provision of technology-driven education services. Through its subsidiaries, the Company is engaged in the provision of online K-12 after-school tutoring services. It also offers foreign language, professional and interest courses. The Company conducts its businesses in Mainland China.

Shayne Heffernan Trade Idea

“We think it’s a good idea to really know what you are doing when examining Chinese stocks, especially with something like a GSX that could simply be overhyped and “too good to be true”. Sure, the addressable market might be a huge one, but, as we pointed out, so is the competition. We simply don’t see GSX’s growth last and couldn’t justify its current valuation. From our point of view, there is a disconnect between the company’s fundamentals and its share price. Again, we are not suggesting anything sinister about GSX, but believe it is definitely a stock to shy away from at the current price level, a short selling war is about to start here” Shayne Heffernan PhD in Economics

Why This Matters

At $35, GSX is an $8B company that’s trading at a trailing P/E multiple of greater than 200x and a forward P/E of almost 100x, assuming it can deliver the growth expectation baked in. After posting a ~400% revenue growth in 2019, which was mainly driven by the growth in paid course enrollments for K-12 courses, the street is expecting another ~200% increase for 2020 with a profit margin of ~9%.

Let’s take a moment and reflect on those numbers. How often do you see a company that’s growing at such a pace? Is GSX’s story too good to be true? For the sake of the analysis, we will assume full accuracy of GSX’s financials, so the ultimate question we’d ask is, what’s the proper trading P/E multiple for GSX once its growth slows down? A reasonable range would call for something between 20-30x, implying $270-400mm in net income based on current valuation. Recall that GSX earned $33mm in profit for 2019, so it will have to grow its bottom line at a CAGR of more than 50% for the next 5 years, which is what the streets think will happen. Therefore, at today’s valuation, you’d be paying for a story of 5-year 50% CAGR EPS growth, assuming no share dilution. Is it doable?

Well, let’s look at the annualized 5-year earnings growth rate for the two most successful Chinese EdTech companies – EDU and TAL – and make a comparison to GSX’s. From 2014 to 2019, TAL put up an EPS CAGR of 37% and EDU at 2%. Both TAL and EDU are tremendously reputable and resourceful companies in China, and the fact that they weren’t able to accomplish such growth figure, it makes us wonder GSX’s ability to do so. GSX bulls might argue that EDU and TAL did not concentrate on online courses as GSX does, or that GSX’s smaller revenue base could allow the outsized growth to happen. Sure, while those claims could be true, but at what valuation? The current risk/reward profile just doesn’t justify for GSX, in our opinion.

One saving grace is GSX’s relative valuation compared to a pure-online peer, Koollearn, publicly traded in Hong Kong (HK1797). Koollearn boasts a trailing P/S of 30 with a -20% operating margin. GSX is currently trading at 25 trailing P/S with a 10% operating margin. This is definitely a sector that has benefited from the coronavirus as students were forced to stay home. It will be interesting to see if their growth slows down as people begin to go back outdoors.

Technical Indicators

The projected upper bound is: 45.38.

The projected lower bound is: 33.69.

The projected closing price is: 39.53.

Candlesticks

A white body occurred (because prices closed higher than they opened).
During the past 10 bars, there have been 6 white candles and 4 black candles for a net of 2 white candles. During the past 50 bars, there have been 27 white candles and 23 black candles for a net of 4 white candles.

A spinning top occurred (a spinning top is a candle with a small real body). Spinning tops identify a session in which there is little price action (as defined by the difference between the open and the close). During a rally or near new highs, a spinning top can be a sign that prices are losing momentum and the bulls may be in trouble.

Momentum Indicators

Momentum is a general term used to describe the speed at which prices move over a given time period. Generally, changes in momentum tend to lead to changes in prices. This expert shows the current values of four popular momentum indicators.

Stochastic Oscillator

One method of interpreting the Stochastic Oscillator is looking for overbought areas (above 80) and oversold areas (below 20). The Stochastic Oscillator is 72.3625. This is not an overbought or oversold reading. The last signal was a sell 3 period(s) ago.

Relative Strength Index (RSI)

The RSI shows overbought (above 70) and oversold (below 30) areas. The current value of the RSI is 57.25. This is not a topping or bottoming area. A buy or sell signal is generated when the RSI moves out of an overbought/oversold area. The last signal was a sell 60 period(s) ago.

Commodity Channel Index (CCI)

The CCI shows overbought (above 100) and oversold (below -100) areas. The current value of the CCI is 75. This is not a topping or bottoming area. The last signal was a sell 1 period(s) ago.

MACD

The Moving Average Convergence/Divergence indicator (MACD) gives signals when it crosses its 9 period signal line. The last signal was a buy 13 period(s) ago.

Rex Takasugi – TD Profile

GSX TECHEDU INC closed up 0.620 at 39.610. Volume was 10% below average (neutral) and Bollinger Bands were 4% wider than normal.

Open      High        Low       Close        Volume
39.350    40.700      37.290    39.610       1,007,895
Technical Outlook
Short Term:        Overbought
Intermediate Term: Bullish
Long Term:         Bullish
Moving Averages:  10-period     50-period       200-period
Close:            37.68         37.97           24.72
Volatility:       92            101             92
Volume:           1,259,631     1,206,655       665,858

Short-term traders should pay closer attention to buy/sell arrows while intermediate/long-term traders should place greater emphasis on the Bullish or Bearish trend reflected in the lower ribbon.

Summary

GSX TECHEDU INC is currently 60.2% above its 200-period moving average and is in an upward trend. Volatility is extremely low when compared to the average volatility over the last 10 periods.

There is a good possibility that there will be an increase in volatility along with sharp price fluctuations in the near future. Our volume indicators reflect volume flowing into and out of GSX.N at a relatively equal pace (neutral). Our trend forecasting oscillators are currently bullish on GSX.N and have had this outlook for the last 6 periods.

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