On October 21st, tal education (TAL.US) saw the largest intraday stock price increase of 8.98%, reversing the downtrend since October 2nd.

The reason for this is that as the company's 2025 Q2 financial report disclosure approaches, institutions had predicted that tal education's revenue in the 2025 Q2 quarter would increase by 47.59% year-on-year, and earnings per share would increase by 29.67% year-on-year. Therefore, Morgan Stanley, Citigroup, and Bank of America Securities have all given buy ratings.

It is understood from the Smart Finance APP that on October 24th, tal education officially disclosed its 2025 Q2 financial report. The financial report shows that as of August 31, 2024, in the second quarter of the 2025 fiscal year, tal education's net revenue reached $0.619 billion, a year-on-year increase of 50.4%; net income attributable to tal education was $57.4 million, a year-on-year increase of 51.5%. This obviously exceeds the market's previous expectations.

Looking at the secondary market performance, although different from the continuous two-day decline in the stock price after the Q1 25 financial report, this time after tal education's financial report disclosure, the stock price showed some increase, but the rise was weak. After the stock prices rose by 2.84% and 4.57% on October 24th and 25th, tal education's stock price only slightly rose by 0.18% on October 28th.

Behind the better-than-expected performance

As usual, TAL Education did not disclose its business revenue structure and details in this quarterly report, but investors can still combine the company's operational data to glimpse the development of its various businesses from the overall financial situation.

From a holistic performance perspective, in Q2 of the 2025 fiscal year, TAL Education achieved a net income of 0.619 billion US dollars, a year-on-year increase of 50.4%; achieved operating profit of 47.622 million US dollars, a 49.8% increase from 31.79 million US dollars in the same period last year; at the same time, the net income attributable to TAL Education for the period was 5743.01 million US dollars, a 51.5% year-on-year increase.

With outstanding performance in Q2, TAL Education also achieved significant growth in the first half of the 25 fiscal year. Data shows that TAL Education realized a net income of 1.034 billion US dollars for the period, a 50.4% year-on-year increase; the net profit attributable to TAL Education for the period was 68.833 million US dollars, compared to a net loss of 7.135 million US dollars in the same period last year, marking a substantial growth while turning losses into profits.

From a business perspective, after the 'Double Reduction' policy, TAL Education has repositioned itself as a provider of intelligent learning solutions and realigned its business focus: learning services and other services, learning content solutions. According to TAL Education's data provided at its 2023 fiscal year financial report conference, its learning services, content solutions, and other revenue accounted for approximately 75%, 15%, and 10% of the company's total revenue, respectively.

As a 'new business' established later, the main sales growth driver of the content solution business is its smart devices. At the investor meeting in 2023, TAL Education stated that when asked about the revenue growth of related products and its impact on profit margin, smart devices are in the 'early development stage', focusing on 'optimizing product features'. At the current Q2 earnings conference, TAL Education's President and Chief Financial Officer, Peng Zhuangzhuang, further indicated that 'currently, TAL Education's smart learning hardware is at a loss, mainly due to costs such as product development, research and development, sales, and hardware materials.'

Although TAL Education did not disclose its learning device sales in the financial report, according to Open Securities data, the online sales for the FutureYou FY2025Q2 (Tmall + JD.com + Douyin) amounted to 1.242 billion yuan. Among them, the shipments of learning machines were 0.19 million units, a 93% increase from approximately 0.1 million units in the previous quarter. In August of this year, FutureU launched a new smart hardware product, the XueLian machine. The online sales of the XueLian machine by FutureU in August and September have reached 0.13 billion yuan, with sales of approximately 0.03 million units, expected to become a new driver of revenue growth for the company.

According to general financial logic, as the loss-making content solution business contributes increasingly to TAL Education's revenue, the company's profit margin may be affected. From the data perspective, the Q2 period's gross margin was 56.3%, a year-on-year decrease of approximately 2.6 percentage points, mainly because of the drag from the hardware business; at the same time, the company's current sales expense ratio reached 29.4%, a 1.1 percentage point increase compared to the same period last year, also due to increased marketing investment in the hardware business.

However, on the other hand, TAL Education's current net margin reached 9.26%, and both net margin and gross margin showed growth on a month-over-month basis, to some extent indicating that while TAL Education continues to increase investments in AI and learning devices, it may have already begun to further accelerate its offline education layout with higher profit margins.

Continued investment raises concerns in the market.

Currently, Tal Education has not completely transitioned to developing AI education as the market previously expected. In the eyes of Tal Education, although the AI education function has been significantly improved based on large-scale model technology, there is still a significant gap compared to professional teachers, essentially serving as an auxiliary to enhance the value of the education brand. Therefore, at the current stage, Tal Education is focusing more on empowering offline education through AI, rather than pursuing complete replacement of offline education with AI products. Continuously increasing investment in offline optimization business is the best evidence.

From a policy perspective, in August of this year, the State Council issued the "Opinions on Promoting the High-Quality Development of Service Consumption," mentioning "promoting social training institutions to enhance service quality according to public demand. Guiding schools to introduce high-quality non-academic public welfare after-school services from third-party institutions with corresponding qualifications through purchasing services and other means as required by relevant regulations," which is seen by the market as a positive signal for non-academic training and education.

According to the financial report, at the end of Q2 fiscal quarter, Tal Education's deferred revenue increased by 59% year-on-year, reaching $0.485 billion, reflecting the company's growth in learning service business. Based on Open Securities statistics, during the reporting period, Tal Education added 31 network points (as of the end of FY2025Q1, the number of offline network points exceeded 400); as of the end of October 2024, TAL Education added a net of 23 network points in FY2025Q3 (September to November 2024). In other words, in a clear policy environment, Tal Education is expected to expand its network capacity by over 50% annually.

Driven by core learning service business, in the secondary market, institutions are confident in the revenue growth prospects of Tal Education. S&P Capital IQ data shows that over the past six months, institutional analysts have raised their consensus forecasts for Tal Education's global revenue in fiscal years 2025 and 2026 by 13% and 18% respectively, with corresponding expected revenue growth rates of 41% and 28% for the company.

Looking at the balance of assets and liabilities and cash situation, as of August 31, 2024, Tal Education's total assets were $5.341 billion, total liabilities were $1.592 billion, resulting in an asset-liability ratio of 29.81%. It can be seen that Tal Education has gradually moved away from the traditional heavy asset model of education companies and is transitioning to a light asset operation model. In addition, as of August 31, 2024, Tal Education's cash and cash equivalents amounted to $2.086 billion, accounting for 39.06% of total assets, close to 40%. The company's high level of cash reserves with a total balance of cash, cash equivalents, and short-term investments held at $3.454 billion sets a strong foundation for future continued investment.

However, the market sentiment is not unilaterally supportive of the expectation that Tal Education may continue to increase investment in learning service quality and hardware equipment in the coming quarters and years.

According to S&P Capital IQ data, in the past six months, institutions' consensus forecast for Tal Education's operating profit in fiscal year 2025 has been revised from a loss of $12 million to a loss of $31 million. At the same time, the data shows that sell-side institutions have collectively downgraded their consensus forecast for Tal Education's revenue in fiscal year 2026 by 24% to $74 million. In addition, Tal Education's current trading price is 15 times the EV/EBITDA of fiscal year 2026, which is unattractive.

For market investors, when Tal Education's fundamentals are improving, it should appropriately increase shareholder capital returns. Currently, the market valuation of Tal Education is less than 1 times the enterprise value to revenue ratio for the next 12 months. In this situation, the most direct way to boost Tal Education's stock price is undoubtedly through share buybacks.

However, Tal Education does not seem to be very active in this strategy. According to the Securities Times app, in April of this year, Tal Education extended its share buyback plan by 12 months based on the authorization of the board of directors. The company may repurchase approximately $0.504 billion of common stock by April 30 next year. As of August 31, 2024, the company had only repurchased $0.013 billion of common stock under the buyback plan.