Why GSX Techedu stock climbed 48.6% last month

What happened

Actions of GSX Techedu (NYSE: GOTU) rose 48.6% in July, according to data from S&P Global Market Intelligence. Shares of the Chinese online education company appear to have been boosted by the headwinds linked to coronaviruses.

^ SPX given by YCharts.

GSX Techedu saw massive sales in May following accusations from companies such as Muddy Waters Research and Grizzly Research that the education technology company was fraudulently boosting its revenue and user engagement. GSX has since issued rebuttals to those claims, and its shares continued to show significant gains in June and July amid reports of new confirmed cases of the coronavirus in China.

A child using a computer.

Image source: Getty Images.

So what

The conditions created by the pandemic have led to an increase in demand for online education services, and reports of new infections appear to have prompted many investors to ignore fraud allegations made to GSX. There hasn’t been much company-specific news for the company in the past month, but its stock appears to have benefited from signs of a favorable operating environment and ended July at a new high in its life. .

Now what

GSX stock continued to rally in August trading. Shares are up around 8% on the month so far.

GSX graphic

GSX given by YCharts.

China’s online education industry has huge room for growth and GSX has posted impressive results. But investors should also keep in mind the valuation of the company and the risk that fraud allegations will be substantiated.

GSX has a market cap of around $ 23 billion and is trading at around 96 times expected earnings this year and 22.5 times expected sales. These are high multiples to begin with, and the company’s shares look like a very high-risk investment amid the uncertainties created by class actions and investigations related to alleged fraud.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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