Episode Details

Gaotu Techedu (GOTU) Q2 2026 — Q2 2026 (three months to 30 June): net revenues RMB1,670.1M / $246.1M, +20.2% YoY, accelerating from +13.2% in Q1; gross margin 66.5%; operating expenses $185.8M against $163.7M of gross profit, so a $22.1M operating loss, narrowed from $35.6M. Net loss $20.0M, RMB0.57 (-$0.09) per ADS. Operating cash inflow $126.9M, +46.3% - but the six-month figure is $4.8M, -70.6%. The 6-K landed pre-market on 27 Aug: the ADSs gapped +6.9%, faded to $1.74, closed +5.20%, and added +3.30% the next session. Gaotu holds $588.5M of cash, restricted cash and investments against a market value of $441.9M. On a screen that is a negative enterprise value. But $384.9M of that cash is deferred revenue - tuition already collected for lessons that have not been taught - and the filed shareholders' equity of $154.2M has already netted it off for you. Fund the cost of teaching every lesson already sold, at the filed 33.5% cost ratio, and $380.7M survives: $1.62 an ADS, 86% of the share price. That leaves the market paying about $61.2M for a business turning over $1.06BN at a 66.5% gross margin, still growing 20%. THE CALL: SPEC BUY (3/5, A CASH FLOOR UNDER A BUSINESS THAT STILL LOSES MONEY) — base-case value ~$2.35 vs ~$1.88 today. KEY METRICS: - CALL: SPEC BUY 3/5, fair value $2.35 vs the $1.88 close of 28 August (+25.1%). Bear $0.96, base $2.34, bull $4.04, weighted 30/45/25. Street: 10 ratings, consensus Hold, and NO live target - the newest dated note from a named firm is Citigroup's $5.81 of 5 August 2024, 754 days stale. - THE FLOOR: net cash $509.6M ($588.5M less $78.9M of borrowings) against a $441.9M market value. Deducting the whole $384.9M deferred revenue balance leaves $124.7M ($0.53 an ADS); deducting only the 33.5% cost of delivering it leaves $380.7M ($1.62 an ADS, 86% of the price). Filed shareholders' equity is $154.2M. - THE SPINE: operating cash inflow was $126.9M (+46.3%) while deferred revenue rose $120.6M over the same three months - 95% of it. The March quarter was a $122.1M OUTFLOW while deferred revenue fell $114.0M - 93% of it. Both quarters together: $4.8M against $16.4M, -70.6%. Six months of it moved the cash pile $3.0M. - THE ADS RATIO: three ADSs represent two ordinary shares. 156,703,879 ordinary shares outstanding is 235.1M ADSs, so the market value is $441.9M - not the $682.0M published, which uses 362.7M ADSs and is 54% too high. Corroborated independently by the FY2025 20-F depositary disclosure. - THE QUARTER: revenue $246.1M (+20.2%), gross margin 66.5%, operating loss $22.1M vs $35.6M. Operating costs fell to 75.5% of revenue from 83.4% - a 7.9 point move that halved the gap to operating break-even, from 17.4 points to 9.0. Selling costs alone were $134.6M, 82.2% of gross profit. - WHERE WE DISAGREE: guided Q3 revenue, this quarter's gross margin and costs grown at the +8.8% they actually grew give a FY2026 operating LOSS of $46.7M. The vendor consensus has a $5.3M operating PROFIT, on four revenue analysts and one earnings analyst. We agree on revenue to within 0.6%. Our model crosses into profit in 2028. What to watch: UP: March-quarter gross billings above last March's $146.8M; the operating cost ratio falling below 66.5% of revenue; deferred revenue continuing to grow year on year. DOWN: two consecutive quarters of deferred revenue falling year on year; refunds rising inside gross billings; the cost ratio back above 83%. Also on YouTube: @ChargedAlpha DISCLAIMER: For informational and educational purposes only. Not financial advice. Do your own research before any investment decision.