Oct. 28 (NBD) -- Tencent's rival NetEase announced pricing of IPO of its e-learning subsidiary Youdao (NYSE: DAO) at 17 U.S. dollars last Friday (October 25) while it saw a lackluster start in its first day of trading. Stock of the education unit closed at 12.5 U.S. dollars per share, down by 26.5 percent from the IPO price.

Youdao CEO Zhou Feng expressed his satisfaction of listing the company on the renowned New York Stock Exchange. "It is a milestone for us to successfully complete the IPO. Short-term stock prices fluctuations won't make us unhappy," remarked the CEO in media reports.

Youdao rang the opening bell on the New York Stock Exchange (Photo/VCG)

Youdao's lackluster trading debut in the bourse partly results from its unsatisfying financial performance. National Business Daily (NBD) noticed in the e-learning's prospectus that the firm disclosed an escalating loss in recent years despite a considerable revenue increases. In 2017, Youdao incurred a net loss of 164 million yuan (23.21 million U.S. dollars) and the tally further widened to 209 million yuan (30 million U.S. dollars) in 2018. For the six months ended June 30, 2019, Youdao's net loss added 30.6 percent to 168 million yuan from an year-ago period.

The company also saw its cost of revenues balloon to a record 390 million U.S. dollars in the first half year of 2019, representing a year-over-year increase of 71 percent. 

It is noteworthy that more than half of Youdao's net revenues flow to cover the expenses of sales and marketing, and research and development. Take 2018 as an example, Youdao reported net revenues of 732 million yuan, with 397 million yuan spent on the above two segments. Furthermore, sales and marketing expenses accounted for 49 percent of the total operating expense.

"In the education industry, it is not difficult to make a profit in a long run after scaling up the business reach, no matter for offline or online education business," said Youdao CEO Zhou to news outlets, when speaking of the company's tremendous loss. Furthermore, Zhou attributed the loss to the over-enthusiasm for the industry, saying that "people are optimistic about the industry and pump large investment into it in a short time". 

High customer acquisition costs, tremendous marketing expenses and fierce competition from offline education make e-learning a cash-burning industry with slow return, thus making it difficult for companies to yield a profit. 

NBD noticed that NetEase-backed Youdao is not the sole e-learning platform to report a net loss for three consecutive years. Liulishuo (NYSE: LAIX), a pioneer in the Chinese AI-powered English learning market, went public on the New York Stock Exchange in September 2018, a year before Youdao. Liulishuo's net loss for the full year of 2018 was 488.1 million yuan and like Youdao, its sales and marketing expenses for the same period dominated its operating expenses, with 76 percent of operating expenses going to sales and marketing.

Email: gaohan@nbd.com.cn