TAL Education Q3: Bullish On Revenue Beat And Potential Catalysts (TAL)

Elevator Pitch

My investment rating for TAL Education Group (NYSE:TAL) stock is a Buy now.

I previously reviewed TAL’s financial performance for the first quarter of fiscal 2024 (YE February) in my September 29, 2023 writeup. The focus of the current article is the evaluation of TAL Education’s most recent Q3 FY 2024 financial results and the identification of potential catalysts for the stock.

TAL’s latest quarterly revenue exceeded the market’s expectations, which has favorable read-throughs for the company’s future top line growth momentum. Better-than-expected sales of new learning devices launched last month and accelerated share buybacks are potential catalysts that could bring about a positive re-rating of TAL Education’s valuations. As such, I have decided to raise my rating for TAL from a Hold to a Buy.

Third Quarter Sales Were Better Than What Analysts Forecasted

TAL Education revealed its Q3 FY 2024 (September 1, 2023, to November 30, 2023) financial performance with a press release issued on January 25, 2024, before trading hours. Investors were clearly pleased with TAL’s latest set of results, as the company’s share price went up by +5.7% on the same day.

Top line for TAL grew significantly by +61% YoY from $232.7 million in the third quarter of fiscal 2023 to $373.5 million for the most recent quarter. TAL Education’s latest quarterly revenue came in +13.2% above the analysts’ consensus sales projection of $330.0 million.

TAL’s revenue growth for the recent quarter was impressive, and the company’s Q3 FY 2024 operating loss didn’t disappoint the market. The normalized loss from operations for TAL Education narrowed from -$32.9 million for Q3 FY 2023 to -$32.2 million in Q3 FY 2024. The company’s actual third quarter non-GAAP operating loss was better than the market’s consensus estimate of -$32.8 million (source: S&P Capital IQ).

At its Q3 FY 2024 earnings briefing, TAL Education credited the company’s substantial top line beat to healthy sales of its “learning devices” under the content solutions business and the increase in “capacity of our learning center network” for its learning services business.

Also, TAL’s operating loss margin improved from -14.1% in Q3 FY 2023 to -8.6% in Q3 FY 2024. In my view, the company’s operating profitability improvement is attributable to positive operating leverage effects, as the company grows its revenue rapidly on a cost base that has a high proportion of fixed expenses.

Watch Out For Key Re-Rating Catalysts

TAL’s shares rose by +55% in the past year, but I think that the stock is still undervalued. The market is now valuing TAL Education at 0.08 times (2.59/34.2) growth-adjusted Enterprise Value-to-Revenue based on the company’s FY 2024-2025 consensus revenue CAGR of +34.2% (source: S&P Capital IQ) and the stock’s consensus next twelve months’ EV/Revenue multiple of 2.59 times.

My view is that TAL Education is able to trade at a more demanding valuation multiple in the future with the realization of two key catalysts.

The first potential catalyst is the introduction of new learning devices.

According to a December 21, 2023 news article (translated from Chinese to English using Google Translate) published on Chinese news portal Sohu.com (SOHU), TAL had introduced the xPad2 Pro and the xPad2 Pro Max (a larger version of xPad2 Pro) learning devices to the market last month.

TAL Education’s xPad2 Learning Devices

In my opinion, these two new products are likely to generate higher sales and profits for TAL as compared to the company’s existing xPad product (the predecessor of the new xPad2 product line). The xPad2 Pro and xPad2 Pro Max are expected to be more popular than the xPad because they offer the MathGPT application that claims to be the first LLM (Large Language Model) focused on mathematics which I highlighted in my late-September article. The original xPad learning device doesn’t offer MathGPT. Also, the new products carry higher selling prices (source: December 21, 2023, Sohu.com news article referred to above). The xPad was sold for RMB4,599 apiece, while the latest xPad2 Pro and xPad2 Pro Max products are priced 43% and 87% higher than the xPad, respectively.

The analysts currently estimate that TAL Education will record a reasonably strong YoY revenue growth of +43.6% for the final quarter of FY 2024 (December 1, 2023, to February 29, 2024) as per S&P Capital IQ data. The sell side also sees its normalized operating loss narrow from -$32.2 million for Q3 FY 2024 to -$27.7 million in Q4 FY 2024. I think that the new learning devices will put TAL in a good position to deliver another positive surprise when it releases its Q4 FY 2024 results in late April (estimated) this year.

TAL Education’s second potential catalyst is a more aggressive pace of share repurchases for the company in the near future.

The company’s current share buyback authorization allows it to spend as much as $737.4 million on share repurchases between end-April 2023 and end-April 2024. But TAL Education didn’t buy back any of its own shares in Q3 FY 2024. In fact, TAL still has half a billion dollars (or $503.8 million to be exact) remaining from its current share buyback authorization.

I am of the view that TAL Education will be motivated to buy back its own shares at a faster pace going forward.

At the company’s recent Q3 FY 2024 earnings call on January 25, a sell-side analyst from Chinese broker CICC asked about TAL’s “buyback plans” given that TAL’s “business is really going well and we are accumulating more cash.” In response to the analyst’s query, TAL mentioned that it is considering “multiple potential uses of cash in the future” which includes “shareholder returns” and other investment opportunities.

Separately, a recent January 25, 2024 research report issued by Chinese securities broker CMB International highlighted that the China Securities Regulatory Commission or CSRC is pushing for “listed (Chinese) companies to increase dividend payout and stock buybacks” based on recent comments from CSRC officials. While TAL Education isn’t listed in Hong Kong or Mainland China, it is reasonable to assume that TAL (as a Chinese company) is competing for the attention and investments of China-focused investors with other Chinese stocks. As more companies listed in Mainland China or Hong Kong enhance their shareholder capital returns in response to Chinese regulators’ comments, there is likely to be pressure on TAL to do likewise.

Final Thoughts

The market is impressed with TAL Education’s recent quarterly results as evidenced by the +5.7% jump in its stock price on the day of its third quarter earnings announcement. TAL’s shares have the potential to rise higher with catalysts relating to new products and share repurchases.