Summary of Key Points
Gaotu's financial report for the second quarter shows impressive figures (20% revenue growth, record-high cash income, and reduced losses), yet its stock price and market value have plummeted to a fraction of what they were five years ago (from 37.8 billion yuan to 440 million US dollars). The reasons are as follows: The apparent profitability is fueled by high sales expenses, and compliance issues have shifted from the capital market to actual operations (constant fines and complaints). The so-called "quality education" transformation may merely be a rebranded form of subject-based training. The company's core business relies on the ambiguous "gray area benefits" of policies (such as high school training and unregulated prepaid services for adults). What the market doesn't favor are these underlying risks, rather than the short-term financial figures.
I. Good Financial Figures, but Is the Profitability a Mask?
Looking at just the second quarter, revenue increased by 20% to 1.67 billion yuan, and net losses decreased by 37% to 269 million yuan. Management also claims that AI has helped reduce expenses. However, a longer-term perspective reveals the issues:
- Unstable Profitability: Net profit plummeted by 72% in the first quarter, and the company still lost 323 million yuan for the year. The fluctuating quarterly profits are mainly due to sales expenses, which amounted to 913 million yuan in the second quarter, accounting for 54.7% of revenue (compared to 78% in 2021). For example, 135 million yuan of the additional revenue in the first quarter was spent on sales expenses, meaning nearly 70% of the profits were used on advertising. Research and development expenses are only one-fifth of sales expenses, and the so-called "AI cost reduction" is merely a minor optimization. The underlying driver of growth is still spending money to acquire users.
- Seasonal Cash Flow Illusion: The operating cash flow netted 860 million yuan in the second quarter, while it netted out 828 million yuan in the first quarter, a difference of 170 million yuan. This is due to the prepayment model in the education industry, where funds are received concentratedly during the summer. Quarterly data can be misleading; those who are optimistic use the second quarter as evidence, while those who are pessimistic use the first quarter as counterarguments. However, the cash flow is not truly stable.
II. Compliance Issues: From "Bookroom Controversies" to "Concrete Evidence"
Gaotu was previously accused by short-selling institutions of inflating revenue, but the investigation did not confirm these claims, and the SEC also terminated it. However, the current compliance issues are more serious and represent real obstacles:
- Continuous Fines: In 2021, the company was fined for false advertising (actors pretending to be teachers, fictitious marked prices). In 2024, it faced fines for operating without a license (in Jinan and Tianjin subsidiaries) and for improperly collecting user information (Gaotu's high school app). The most serious case in 2025 was a notice from Haidian District, Beijing, for illegally organizing offline subject-based training (a rare occurrence for leading companies after the "Double Reduction" policy).
- Surging Consumer Complaints: Complaints about Gaotu on the Black Cat platform increased from over a hundred at the beginning of 2021 to 6,225 by the end of 2024, mainly focusing on non-refunds and false advertising. Earlier disputes were about the accuracy of financial reports; now, the focus is on whether the company is adhering to regulations. These concrete issues directly affect its reputation and user trust.
III. "Quality Education": A Rebranded Form of Subject-Based Training?
After the "Double Reduction" policy, Gaotu renamed its K12 business "Quality Education," but upon closer inspection, the content still revolves around improving test scores:
- Nature of Courses: Thinking courses are linked to mathematics, humanities courses to Chinese language (explicitly aimed at improving problem-solving skills), and science courses are based on school-level physics and chemistry knowledge. Marketing materials directly state that these courses "correspond to school exam points and are more effective in improving scores." Parents are still paying for fourth-grade Chinese and math courses, which is no different from the original subject-based training.
- Policy Risks: The Ministry of Education has clearly stated that conducting subject-based training under the guise of "thinking training" or "quality development" is illegal. Although the authorities have not officially classified Gaotu's online courses as such, this rebranded approach could easily cross the line. Once classified as illegal, this revenue-generating business (accounting for 40% of total revenue) could be at risk.
IV. Can the Company Sustain Growth by Relying on "Gray Area Benefits"?
Gaotu's core revenues (with high school training accounting for over 45% and double-digit growth in its adult business) depend on ambiguous policies:
- High School Training: The "Double Reduction" policy is only "referentially implemented" for high schools, and the detailed rules have not been finalized. In 2022, Beijing temporarily halted Gaotu's high school winter courses, but they were restarted in 2023. The scarcity of licenses (only a few thousand nationwide) creates a temporary advantage, but this could change at any time.
- Adult Business: Courses for postgraduate and civil service exams are growing rapidly, and since adult education institutions are not yet subject to prepaid regulation, Gaotu can charge the full year's fee in advance without refunds after the course ends. This is a common source of complaints (such as the "Central and State-Owned Enterprises Emergency Rescue Plan" controversy in July this year).
- Hidden Concerns: Gaotu has invested 2 billion yuan in building training centers in Zhengzhou and Wuhan (heavy asset expansion), but the CFO who has been in office for seven years suddenly resigned without a successor. Additionally, the majority shareholder, Chen Xiangdong, holds 90% of the voting rights, increasing the company's decision-making risks.
Conclusion: The Risks in the Second Half of the Transformation Are Not in Gaotu's Hands
In the first half of its transformation, Gaotu achieved short-term growth by spending money and exploiting policy loopholes. However, the key questions for the second half remain unanswered: Will it continue to cross compliance boundaries? Will the declining birth rate (7.92 million people) reduce demand? After the surge in spending subsides, will the renewal rates and reputation of its "quality education" courses hold up? Financial reports may show positive quarterly results, but fines and complaints do not lie. Gaotu's future actually lies in the hands of regulators, users, and the market—this is the fundamental reason why the market is skeptical about its prospects.