Why GSX Techedu Stock Was Crushed on Wednesday

What happened

There are two things happening with Chinese education platform GSX Techedu (NYSE: GSX) today. First, the stock was downgraded by an analyst at Credit Suisse. But also floating around is an unsubstantiated rumor that GSX Techedu's management is going to significantly lower guidance for upcoming third-quarter earnings; this after the company confirmed last month that Securities and Exchange Commission was investigating the company. The stock was down 28% as of 11:15 a.m. EDT.

So what

Credit Suisse analyst Alex Xie believes the online-education space in China is getting more competitive, according to The Fly. With more competition, the chance for organic sales growth goes down, in theory. So if that plays out, one would expect GSX Techedu's revenue growth to slow or for the company to increase its advertising budget. Neither is a great scenario for a growth company.

A frustrated man places his hands on his head while facing a red stock chart

Image source: Getty Images.

Overshadowing this downgrade is an unsubstantiated rumor making the rounds that GSX Techedu management foresees a loss of RMB 900 million in Q3. For perspective, the company reported net income of RMB 18.6 million in Q2 on revenue of RMB 1,650 million. For Q3 it had guided for revenue of RMB 1,936 million to RMB 1,966 million, making a loss of RMB 900 million (around $135 million) a gargantuan downside development.

Now what

In my opinion, GSX Techedu stock is getting crushed more by the rumor than the downgrade. However, I would give Xie's opinion more weight in making an investment decision. Rumors are just that -- rumors. As a long-term investor, I advocate for taking more tangible factors into account. Xie's thoughts on GSX's deteriorating cost structure is something shareholders should consider, to evaluate whether the argument holds water.

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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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