New Oriental Earnings: Strong Revenue Growth Beats Expectation but Shares Are Expensive

New Oriental's fiscal 2024 second-quarter (ending November 2023) result beat our expectation. Revenue in the quarter increased by 36% year on year, 8% higher than the upper end of management guidance. In addition, management guided for revenue to grow 42%-45% year on year for the third quarter. After revising our revenue growth assumption to 35% from 27% for 2024, we raise our 2024 revenue forecast to USD 4.0 billion from USD 3.8 billion, and our net income forecast to USD 353 million, from USD 328 million. We also raise our net income estimates by 16%-19% for fiscal 2025 to 2028. As a result, we increase our fair value estimate to USD 51 from USD 47. New Oriental’s share price closed 49% above our new fair value estimate on Jan 24. We think investors are overly optimistic with its growth and margin outlook. To justify the share price, we think New Oriental’s revenue needs to grow at 25.0% CAGR from fiscal 2023 to 2028 while adjusted operating margin expands to 16.8% by 2028 compared with our forecast of 14.5% revenue CAGR and 13.8% adjusted operating margin.