Based in Shenzhen, China, English language training (ELT) services provider Meten EdtechX Education Group Ltd (METX) operates through four segments — General Adult English Training, Overseas Training Services, Online English Training, and Junior English Training. Although the rapid expansion of its Junior ELT business has helped the stock gain 34.5% year-to-date, the stock is down 8.8% over the past month.

In fact, METX is currently trading 89.1% below its 52-week high of $24.66, indicating short-term bearishness. In its last reported earnings results, the company reported a significant loss and declining revenue. In addition to that, increasing competition in the e-learning market could hamstring METX’s growth in the coming months.

While the company’s plans to reopen all its learning centers in China could help it recover the losses and strengthen its cash balance in the long run, we think its current weak financials and premium valuation might dampen the stock’s performance in the near term.

Here’s what could influence METX’s performance in the near term:

Fierce Market Competition

With the COVID-19 pandemic as the backdrop,  online education platforms in China have experienced a big  surge in demand. As such, various educational institutions have entered the digital battleground, making the e-learning market more competitive. The current competitive landscape could significantly reduce the market share gained by each player, potentially leading to a price war that could erode METX’s profit margin.

Resumption of Operation of Learning Centers

METX plans to reopen all its learning centers this year after a temporary shutdown due to the pandemic. The company operated a total of 118 learning centers in China at  the end of 2020. This compares to 148 operational centers in 2019. Even though there has lately been a resurgence of COVID-19 cases in the country, METX still expects to resume operations of all its learning centers this month, which would strengthen its financial performance and achieve decent results in the long-run.

Weak Financials

METX’s revenue has declined 29.6% year-over-year to RMB 297.7 million in the third quarter ended September 30, 2020. The company’s adjusted EBITDA declined to a loss of RMB 9.1 million, while its loss from operations was RMB 59.8 million, compared to a gain  from operations of RMB 44.3 million in the third quarter of 2019. METX generated a net loss of RMB 39.7 million over this period. Also,  the company’s net operating cash outflow was RMB 69.7 million, compared to an inflow of RMB 56.4 million in the third quarter of 2019.

Mixed Profitability

METX’s trailing-12-month gross profit margin of 36.45% is 9.7% higher than the industry average of 33.2%. However, its trailing-12-month levered free cash flow margin of 6.2% is 14.5% lower than the industry average of 7.3%. In addition, its trailing-12-month CAPEX/sales of 8.3% is 234.2% higher than the industry average  2.5%.

Expensive Valuation

In terms of trailing-12-month price/sales, METX is currently trading at 4.62x, which is 213.9% higher than the industry average 1.47x.

POWR Ratings Indicate Uncertain Prospects

METX has an overall rating of C, which equates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. Among these categories, METX has a grade of C for Momentum, which is consistent with the decline in price over the past month.

Also, it has a grade of C for Value and Quality, given its premium valuation and lower-than-industry EBIT margin.

METX is currently ranked #63 of 86 stocks in the D-rated China group. In addition to the grades I’ve highlighted, you can check out METX’s POWR Ratings for Sentiment, Stability, and Growth here.

If you’re looking for better stocks in the China group, with an Overall POWR Rating of A or B, you can access them here.

Bottom Line

METX’s rapid growth trajectory in the Junior ELT business segment has helped the company gain significantly year-to-date. However, its weak financials, premium valuation, and mixed profitability in an immensely competitive Chinese e-learning market could create roadblocks for the stock. Hence, we think it best  that investors wait for better entry points in the stock.

Want More Great Investing Ideas?

11 Top Stocks for March 2021

9 “MUST OWN” Growth Stocks for 2021

How to Ride the 2021 Stock Market Bubble

5 WINNING Stocks Chart Patterns

METX shares were trading at $2.95 per share on Monday afternoon, up $0.26 (+9.67%). Year-to-date, METX has gained 47.50%, versus a 5.30% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

More Resources for the Stocks in this Article