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GSX Techedu - An Unsustainable Story, The Stock Should Be Avoided

May 04, 2020 10:49 AM ETGaotu Techedu Inc. (GOTU)EDU, TAL11 Comments
DX2 Capital profile picture
DX2 Capital


  • There have been lots of noise surrounding Chinese stocks recently, as the result of Luckin Coffee’s (LK) financial fraud.
  • We conducted our own due diligence on GSX and came away with similar bearish views as Citron and Grizzly.
  • We see no competitive advantage in GSX, believe that its growth is unsustainable, and have doubts over its management.
  • At its current valuation, GSX is to be avoided.


Multiple short reports were published on GSX (GSX) recently, one by Grizzly and one by Citron. Both reports pointed at similar red flags, such as the accuracy of GSX’s enrollment and the ethos of its management. We are certainly not calling GSX to be the next LK, but after reviewing the bears’ analysis, we are mostly in alignment with them. We will go through our bear thesis in this article.

The GSX Story and Chinese EdTech

Since its IPO in 2019, GSX’s share price soared from $10 to as high as $45 in early 2020 and has since cooled down to ~$35, representing a market cap of roughly $8B, a trailing P/E of ~200x and a forward P/E of ~100x. Although its earnings results have been tremendous - during the latest earnings announcement, 2019 revenue grew more than 400%, and the street is expecting another 200% increase in 2020 - we believe the stock is overvalued and think the hyper-growth is unsustainable.

GSX positions itself as a leader in the Chinese education technology field and claims to be the 3rd largest online K-12 large-class after-school tutoring service provider in China in terms of gross billings in 2018. GSX and the overall online education industry lure students by giving out a couple of free classes and charge between $200 to $500 USD per normal class. According to its students, once their info is registered, they are bombarded with nonstop marketing in their SMS, Wechat, and Email from GSX. While it might be a useful tactic to drive up demand in the short term, we don't think it will be sufficient to maintain its growth in the long term, based on the negative feedback from those who had attended and reviewed its courses.

The competition is fierce in this industry. It’s comparable

This article was written by

DX2 Capital profile picture
DX2 Capital is a New York-based global long/short equity fund that primarily invests in growth companies, based in Asia, North America, and Latin America, that are shaping the world or have the potential to become future market leaders. The fund invests across all market cap spectrums and focuses on the technology, financials, and retail sectors.We believe in a balanced portfolio with global diversification. We focus on risk-adjusted return measured by Sharpe and Sortino ratios.

Analyst’s Disclosure: I am/we are short GSX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (11)

DX2 Capital profile picture
Latest research from Muddy Waters.

sudden decline today on no news. no new short reports i can find.
Whole bunch of 35 puts expiring today 15May20. Short interest has also gone throught the roof at 23.04 million shares as of end April. The number is likely higher by now.
zorrba profile picture
Why do you think GSX is trading higher on lower than average volume the last couple of days?
double beat and raise with huge numbers released this morning. In addition, invites Citron & any other shorts to visit company and pay their travel expenses so they can better educate them on GSX business. If Shorts don't take them up on it before releasing trash data to drive down stock price there should be massive lawsuits by all investors.
When the market does not believe it, means not a lot.
I might take them up on it.
Somebody maybe Manipulating stock prices,but why no body short it?
Nobody short it?

1. Short interest is 16.6mio shares and short sellers has been increasing their shorts since IPO. Data based on end Apri 2020.

2. Total call Open Interest (outstanding contracts) is on 37,466 versus Put Open interest at 98,156 contracts as of 6May2020.

I say that there are serious short sellers, and options traders are shorting it and waiting for the share price to tank like Luckin last month.

And when you have earnings numbers like what was reported and the share price does not rise, you have to conclude that good chance something is brewing and holding a long position is Not a wise play.
earnings will show good growth.
Not sure why author chose to distort the valuation nor mention EDU's & TAL's loftier valuations.
Looking at YahooFinance and adjusting EPS for USD it appears the PE of GSX is 47, EDU 181 and TAL 290. On a PEG basis GSX is 0.48, EDU 3.64 and TAL 3.66. Unclear why GSX is the problem valuation here. Must be Shorts just hyping the story, not like that's ever happened before.
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