By Stjepan Kalinic
This article originally appeared on Simply Wall St News.
TAL Education Group ( NYSE:TAL ) might not be a large-cap stock, but it saw significant share price movement during recent months on the NYSE, rising to highs of US$90 and falling to the lows of US$6.
Investing in Chinese stocks has always carried a prominent political risk. Just days ago, the government announced an overhaul of the US$100b education tech sector , essentially banning the companies that teach the school curriculum from operating for profit, raising capital, or going public.
Needless to say, this devastating news crushed the sector, sending TAL Education Group down over 70%. Over the last 1y, the stock is down over 90%.
Some share price movements can give investors a better opportunity to enter into the stock and potentially buy at a lower price. A question to answer is whether TAL Education Group's current trading price of US$6.00 is reflective of the actual value of the mid-cap? Or is it currently undervalued, providing us with the opportunity to buy?
NYSE:TAL Stock Price July 26th, 2021
Yet, with US$5.9b in cash and short-term investments offsetting the US$2.3b long-term debt, this gives confidence that the company will be able to ride out the short-term transitory turmoil.NYSE:TAL Balance Sheet July 26th, 2021
Can Things Get Worse?
While the new restrictions will ban the majority of K12 after-school tutoring activities (or make them non-profit), there are still possible loopholes as new regulations do not ban all subjects, rather specified categories like languages, mathematics, physic, and similar; while keeping humanist sciences, arts, and sports.
This is not the first time China is regulating the sector, as an earlier attempt in 2018 tried to ban tutoring activities after 8:30 pm. Yet, that didn't stop the development of the sector. Often these reforms have a lot of noise but little substance behind them.
Meanwhile, many citizens who work long hours ( up to 70 hours per week ) rely on online tutoring as a way to increase their children's prospects. To those parents, companies like TAL provide a proxy parenting service with a learning bonus on the top. This is where brand management will play a crucial role in survival as many smaller players won't survive the initial aftershock, and their market share will be scooped up by the large players with solid balance sheets.
Ultimately, TAL Education has all the markings of a high-risk play: high volatility, political risk, and a bargain price.
In terms of investment risks, we've identified 3 warning signs with TAL Education Group , and understanding these should be part of your investment process.
If you are no longer interested in TAL Education Group, you can use our free platform to see our list of over 50 other stocks with a high growth potential.
Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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