The financial report was released and the stock price plummeted by nearly 20%. Is TAL Education Group Sponsored ADR Class A (TAL.US) a "Davis double kill" or is it building momentum for the next market rally?

In recent days, TAL Education Group Sponsored ADR Class A (TAL.US) disclosed its annual report for the 2025 fiscal year. The company achieved $2.25 billion in revenue during the period, a year-on-year increase of 50.98%; Net profit attributable to the parent company for the period changed from a loss of $3.573 million in the previous year to a profit of $84.591 million, marking the first time TAL Education Group Sponsored ADR Class A has turned a profit after six consecutive years of losses. However, following the release of this double-digit revenue growth and return to profitability financial report, on April 24th, the stock price of TAL Education Group Sponsored ADR Class A plummeted by 18.67%, with an intraday loss of up to 19.31%. The main issue arose from the company's performance in the fourth quarter of 2024. In the fourth quarter, TAL Education Group Sponsored ADR Class A achieved a net income of $610 million, a year-on-year increase of 42.1%, but this performance fell short of market estimates of $640 million. In terms of net profit, the net loss attributable to TAL Education Group Sponsored ADR Class A was $7.3 million, compared to a profit of $27.5 million in the same period last year, resulting in a shift from profit to loss. Additionally, the company's earnings per ADS on a Non-GAAP basis and diluted basis in Q4 were $0.01, lower than the market's general expectation of $0.09. The stock price of TAL Education Group Sponsored ADR Class A entered a stage of oscillation and stagnation after reaching a peak of $15.30 on February 20th. However, on April 4th, the stock price of TAL Education Group Sponsored ADR Class A followed the overall decline in the U.S. stock market. From April 4th to 10th, the stock price of TAL Education Group Sponsored ADR Class A fell by 28.57%, breaking through key technical levels and trading below the 30-day moving average. Despite the significant decline, the stock price stabilized due to the company's focus on education services primarily in the domestic Chinese market. Following the financial report release on April 24th, there was continuous pressure from holders to sell the stock, resulting in significant selling pressure. The trading volume on that day surged to 42.8277 million shares, breaking the record set on September 30th last year with 40.1673 million shares. Considering the operations and financial data, in the fourth quarter of 2024, TAL Education Group Sponsored ADR Class A experienced revenue growth of 35% in its learning services business (including quality education and offline small-class courses) and 50% in its content solutions (smart hardware, AI learning devices). However, due to a slowdown in hardware sales and lower than expected enrollment in some regions for offline courses, revenue growth for the quarter fell short of Bloomberg's consensus estimate of 47.2%. Additionally, on the profitability side, TAL Education Group Sponsored ADR Class A saw a significant decline in adjusted net profit due to increased sales expenses and research and development costs. Ultimately, Morgan Stanley downgraded its investment rating for TAL Education Group Sponsored ADR Class A based on this Q4 financial report, shifting from a hold to a neutral rating. Combined with the recent emotional market trend in the U.S. stock market, this report to some extent amplified market panic, leading to a nearly 20% drop in the stock price of TAL Education Group Sponsored ADR Class A in a single day. We have arrived at a turning point in the battle It has been over three years since the "double reduction" policy was introduced. During this time, TAL Education Group Sponsored ADR Class A's core task has been to clear K12 education, reduce costs, and seek new directions. In 2022, when many peers were transitioning to live streaming sales or expanding overseas, TAL Education Group Sponsored ADR Class A chose to capitalize on the artificial intelligence wave sparked by ChatGPT at that time and focus on offline quality education around generative artificial intelligence.Intelligent education and smart hardware business. In other words, TAL Education Group Sponsored ADR Class A has mainly been focusing on validating the feasibility of the development of the above two business lines in recent years.In this 24 fiscal year annual report, the company's CFO Peng Zhuangzhuang stated, "We are pleased to announce that in the fourth quarter and full year of this fiscal year, both the revenue of learning services and content solutions business achieved year-on-year growth." Looking at the operational data, after divesting the subject tutoring business, the company retained the three core segments of learning services, content solutions, and technology solutions. In the 24Q4 fiscal quarter, TAL Education Group Sponsored ADR Class A's learning services business still contributed 70.6% of revenue. According to statistics, as of February 25 of the 25th year, the company's teaching outlets have increased by about 70% year-on-year, with new teaching points mainly concentrated in third and fourth-tier cities; at the same time, the number of offline learning centers of Xueersi has reached 450, a 50% increase compared to the same period last year, covering 38 cities nationwide. The retention rate of Xueersi's offline literacy small classes has reached 80%. In terms of smart hardware, during the reporting period, the revenue contribution of the content solutions business increased to 29.4%, and the online sales of Xueersi learning machines increased by 88% year-on-year, with sales reaching 356,000 units, ranking first in the industry. Furthermore, at the financial report meeting, TAL Education Group Sponsored ADR Class A also revealed that its smart hardware has maintained high activity while expanding user coverage: quarterly data shows that its weekly activity rate remains stable at around 80%, and the average daily usage time per device is about 1 hour. After both operational and financial data confirmed the long-term development potential of the intelligent route, the next step for TAL Education Group Sponsored ADR Class A is to "leverage" in the business, that is, to expand its footprint. In terms of development milestones, TAL Education Group Sponsored ADR Class A has reached a key point in the "offense-defense transformation" of its business development. From a policy perspective, the previous "National Education Plan for Building a Strong Education Country" (2024-2035) clearly stated that it is necessary to improve the level of lifelong learning public services, implement the national education digitalization strategy, and promote artificial intelligence to help education transformation. Recently, the Ministry of Education and other nine departments jointly issued the "Opinions on Accelerating the Promotion of Education Digitalization" ("Opinions"). Based on the summary of the implementation of the national education digitalization strategy over the past three years, the "Opinions" comprehensively deployed the promotion of education digitalization in the future stage. In summary, TAL Education Group Sponsored ADR Class A is currently seizing the trend of educational technology and expanding its investment accordingly. It is understood that TAL Education Group Sponsored ADR Class A had a non-GAAP net profit of 7 million US dollars in the 24Q4 quarter, although it decreased by 85% year-on-year, mainly due to a 73% year-on-year increase in sales expenses (reaching 218 million US dollars), which was used for the expansion of offline learning centers and the promotion of hardware products. At the financial report meeting, Peng Zhuangzhuang also explicitly stated, "The company plans to add 100 teaching points in the 2025 fiscal year and increase research and development investment in AI learning devices, aiming to increase the proportion of hardware business revenue to 35%. Adding to the cash flow situation disclosed in the financial report, as of February 28, 2025, the company's total cash, cash equivalents, and short-term investments reached 3.618 billion US dollars, an increase from the previous fiscal year's 33.03 billion US dollars. All of these lay the foundation for its future business growth.