Is China Online Education Group (COE) A Good Service Bet?
China Online Education Group (NYSE:COE), a USD$253.70M small-cap, operates in the consumer services industry, whose activities are primarily project-based work with individual clients, which depends on the general sentiment of the economy. Consumer services analysts are forecasting for the entire industry, a strong double-digit growth of 18.59% in the upcoming year , and a massive triple-digit earnings growth over the next couple of years. Not surprisingly, this rate is more than double the growth rate of the US stock market as a whole. In this article, I’ll take you through the sector growth expectations, as well as evaluate whether COE is lagging or leading in the industry. See our latest analysis for COE
What’s the catalyst for COE’s sector growth?
A main driver of the industry has been the growing relevance of e-commerce for consumer services, enabling companies to reduce cost to serve while growing market presence at the same time. More than ever, it is crucial for the incumbents to position itself to respond to the growing relevance of pure e-commerce players and also build on their own e-commerce capabilities. In the previous year, the industry saw growth in the twenties, beating the US market growth of 10.30%. COE leads the pack with its impressive earnings growth of 73.01% over the past year. This proven growth may make COE a more expensive stock relative to its peers.
Is COE and the sector relatively cheap?
Consumer services companies are typically trading at a PE of 25x, in-line with the US stock market PE of 22x. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. However, the industry returned a higher 16.75% compared to the market’s 10.06%, potentially illustrative of past tailwinds. Since COE’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge COE’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? COE recently delivered an industry-beating growth rate in earnings, which is a positive for shareholders. If you’re bullish on the stock and well-diversified by industry, you may decide to hold onto COE as part of your portfolio. However, if you’re relatively concentrated in consumer services, you may want to value COE based on its cash flows to determine if it is overpriced based on its current growth outlook.
Are you a potential investor? If COE has been on your watchlist for a while, now may be the time to enter into the stock, if you like its ability to deliver growth and are not highly concentrated in the consumer services industry. Before you make a decision on the stock, take a look at COE’s cash flows and assess whether the stock is trading at a fair price.
For a deeper dive into China Online Education Group’s stock, take a look at the company’s latest free analysis report to find out more on its financial health and other fundamentals. Interested in other service stocks instead? Use our free playform to see my list of over 100 other service companies trading on the market.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
