Youdao Posts Earnings Miss in Q2 2025; Market Reacts with Delayed Optimism

Introduction

Youdao (DAO) delivered another mixed performance in Q2 2025, posting a net loss for the second consecutive quarter and falling short of expectations. The results highlight ongoing challenges in the Diversified Consumer Services sector, where earnings misses are not uncommon and typically yield minimal immediate market impact. However, Youdao’s stock has shown a distinct pattern of delayed recovery following such reports, setting it apart from broader industry trends. Investors are now closely watching how the market digests the latest earnings shortfall and whether the company’s long-term strategy can restore confidence.

Earnings Overview & Context

Youdao reported total revenue of RMB 2.714 billion in Q2 2025, representing continued pressure on its top-line growth. The company’s net income attributable to common shareholders stood at -RMB 87.043 million, with a basic earnings per share (EPS) of -RMB 0.7283, indicating a sharp earnings miss relative to expectations. Operating income turned negative at -RMB 81.887 million, while the total operating expenses hit RMB 1.400 billion, driven largely by high marketing, selling, and general administrative expenses of RMB 1.061 billion.

These results underscore the company’s struggle to control costs amid fierce competition in the online education and AI-powered services markets. Despite the earnings miss, historical backtesting indicates that Youdao’s stock has shown a unique tendency to recover in the medium term—offering a contrast to the broader sector.

Backtest Analyses

Stock-Specific Backtest

The backtest for Youdao (DAO) shows a distinctive post-earnings pattern. When the company misses earnings estimates, its stock historically demonstrates a 42.86% win rate over three days, which increases significantly to 71.43% over 10 and 30 days. Moreover, the average return climbs from 4.80% at 3 days to 23.48% at 30 days, suggesting that while the initial market reaction is negative, investors often view these misses as a buying opportunity.

This delayed positive reaction may reflect a combination of undervaluation following sharp declines and a belief in the company’s long-term potential, particularly in AI and educational technology. It also highlights the importance of patience and strategy for investors considering Youdao after an earnings miss.

Industry Backtest

Contrasting this with the broader Diversified Consumer Services sector, the backtest shows that earnings misses in this industry historically yield minimal impact. Across 65 occurrences, the maximum return achieved within 59 days was a modest 2.85%, suggesting that the market either anticipates poor results or that other macroeconomic and sector-specific factors dominate investor sentiment. This weak performance reinforces the idea that earnings surprises alone may not be reliable signals for trade decisions in this sector.

Driver Analysis & Implications

Youdao’s current earnings challenges are rooted in high operating costs and the competitive landscape of the online education and AI services markets. The company’s marketing and general administrative expenses are particularly significant, consuming a large portion of its revenue. Without meaningful cost optimization or a clear revenue growth catalyst, Youdao’s ability to return to profitability remains uncertain.

On the macro level, the sector is grappling with regulatory scrutiny and shifting consumer spending patterns, both of which are likely to prolong the earnings pressures. However, the company’s long-term investment in AI and language learning tools may position it for future growth, especially if it can differentiate itself from competitors and scale its offerings internationally.

Investment Strategies & Recommendations

For investors, the key lies in timing and risk tolerance:

• Short-term investors may want to avoid the immediate post-earnings period, given the historically weaker 3-day performance.
• Medium-term investors could consider entering after an earnings miss, leveraging the strong 10- to 30-day recovery pattern.
• Long-term investors should focus on the company’s strategic initiatives, including its AI-driven offerings and international expansion, while monitoring its ability to reduce costs and deliver consistent revenue growth.

Given the industry's muted reaction to earnings misses, it is important for investors to look beyond quarterly results and consider broader fundamentals and market sentiment.

Conclusion & Outlook

Youdao’s Q2 2025 earnings results highlight the company’s ongoing challenges with profitability, but historical data suggests a delayed market recovery after a miss. While the broader Diversified Consumer Services sector shows little response to earnings surprises, Youdao’s stock exhibits a unique post-earnings rebound pattern.

The next key catalyst for the company will be its earnings guidance for Q3 2025, which may offer more clarity on its path to cost control and growth. Until then, investors are advised to balance short-term caution with a watchful eye on the company’s long-term strategic direction.