As the online education industry transitions from a period of rapid growth to a challenging phase of deep restructuring and transformation, the fortunes of industry leaders are experiencing polar opposites.

Gaotu Education, despite notable revenue growth, grapples with immense profit pressures. Financial reports for 2024 reveal that Gaotu Education achieved revenue of 4.554 billion yuan, a 53.8% increase year-on-year, yet suffered a net loss of 1.049 billion yuan, a staggering 14,270% increase from the 7.3 million yuan loss in the same period last year.

Conversely, NetEase Youdao's profitability and cash flow performance have reached all-time highs. In 2024, Youdao's total net revenue stood at 5.6 billion yuan (770.7 million USD), a 4.4% year-on-year increase; operating profit hit 150 million yuan, marking the first full-year profitability; and operating cash outflow decreased significantly by 84.5% year-on-year.

However, beneath Youdao's impressive financial performance lies the harsh realities of a challenging market environment and deep-seated contradictions within its own development, akin to an iceberg lurking beneath the surface.

Online Education Contracts, Hardware Stagnates

NetEase Youdao initially gained a strong foothold through its pioneering role in online education and achieved significant growth via its hardware business, aiming to diversify its portfolio. Yet, its current business landscape faces severe challenges, characterized by a shrinking online education segment and stagnating growth in educational hardware, with the limitations of slower expansion in diversified businesses becoming increasingly evident.

Financial data indicates that in 2024, Youdao's learning services net revenue was 2.7 billion yuan (376.4 million USD), a 12.7% year-on-year decrease. Smart devices net revenue was 903.7 million yuan (123.8 million USD), remaining stable year-on-year, while online marketing services net revenue was 2 billion yuan (270.6 million USD), a 48.3% year-on-year increase.

The intensifying competition in the online education market, coupled with leading players swiftly capturing market share through capital and technological innovation, exacerbates the situation. Additionally, stricter policy oversight has reduced market demand, and the tightening regulations on online education have inevitably led to a decline in revenue. In 2024, Youdao's learning services gross margin fell to 61.4% from 63.2% in 2023, primarily due to decreased revenue resulting in diminished economies of scale.

Furthermore, Youdao's relatively slow expansion in diversified businesses has been starkly highlighted. Its primary businesses focus on online education, smart devices, and online marketing services, lacking close integration and mutual support, resulting in a relatively monolithic business model. The contraction in the online education business has not been compensated by growth in the smart device segment, and while online marketing services have seen a 48.3% year-on-year increase, they alone cannot carry the overall business development. This model might sustain operations in a stable market but lacks resilience and risk resistance in the current industry reshuffle and changing market demands.

Moving forward, NetEase Youdao must actively expand its diversified businesses and reduce dependence on a single revenue stream.

Hardware Features Converge, Trapped in 'Homogenization' Quagmire

Over the past few years, Youdao has actively ventured into the educational hardware market, launching various smart learning devices like dictionary pens, achieving certain success and long considered a crucial growth area for the company. However, with rapid market development, Youdao's smart hardware is showing signs of decline.

This trend is evident in smart hardware's contribution to total revenue. In 2022, smart hardware revenue accounted for 26.0% of total revenue, dropping to 16.83% in 2023 and further to 16.13% in 2024, continuously decreasing its share of the company's overall revenue.

The fierce competition in the smart hardware market, encompassing both hardware and content, and severe product homogenization have placed Youdao in a passive position. Firstly, the intense competition and high product homogeneity make it challenging for Youdao to differentiate itself, leading to weak market share growth. Secondly, as consumers' awareness of educational hardware deepens, their needs become increasingly diverse and personalized. Compared to traditional educational enterprises, Youdao lacks technological innovation and content richness, with product functionality and performance failing to meet consumers' evolving needs, resulting in sluggish market expansion and stagnating growth rates.

Additionally, reduced R&D investment has caused Youdao to lag behind competitors in technological innovation, struggling to launch products with differentiated advantages. Financial data shows that Youdao's operating expenses in 2024 were 2.6 billion yuan (356.2 million USD), a 19.6% decrease from 3.2 billion yuan in 2023. Among these, the reduction in R&D staff led to a 540 million yuan (74 million USD) decrease in R&D expenses, a 27.4% year-on-year drop.

In summary, hardware market demand is unpredictable, and accurately grasping consumer needs to launch market-trending products is a significant challenge for Youdao. Future developments will reveal whether Youdao can successfully break out of the homogenization dilemma and rejuvenate the competitiveness of its smart hardware business.

Breaking the AI Implementation Dilemma: Easier Said Than Done

In the era of deep tech-ed integration, AI technology holds immense promise for many educational enterprises, and NetEase Youdao is no exception. Youdao CEO Zhou Feng clarified in a conference call that in 2025, the company will heavily focus on AI-driven education technology and AI-empowered online marketing, underscoring the strategic importance of AI.

As early as 2023, Youdao pioneered with the domestic first educational large model "Zi Yue," swiftly integrating it into its full spectrum of software and hardware products, becoming an industry leader in AI education application. Earlier this year, Youdao further embraced DeepSeek-R1 on the model and technology front, aiming to establish a multi-tiered competitive edge by leveraging general large models' generalization capabilities and vertical models' deep control.

However, commercializing AI technology is not an overnight process, and Youdao faces a long road to forming a stable and efficient profit model with AI support.

From an investment perspective, AI technology R&D is a costly "arms race," and Youdao cannot escape the curse of "large investment, small returns," which adversely affects profitability and market competitiveness. Despite the decrease in R&D expenses in 2024, Youdao had already invested heavily in the AI field beforehand. While Youdao's AI subscription service sales exceeded 200 million yuan in 2024, a year-on-year increase of over 130%, this is merely a fraction of the massive R&D investment and far from sufficient to sustain the AI business.

In terms of application scenarios, integrating AI technology with existing education businesses has not yielded the anticipated "chemical reaction," making it difficult to fully leverage AI's value and even more challenging to effectively convert it into higher commercial value.

For instance, while Youdao Premium Courses, connected to DeepSeek, introduced functional innovations like the "AI Learning Assistant" covering six intelligent scenarios such as essay correction and ancient poetry analysis, providing students with intelligent online tutoring, the usage rate and effectiveness of these features in actual teaching are unsatisfactory. The market response to AI educational hardware has also been mediocre, with sales falling short of expectations.

Notably, multiple large model-based apps launched by Youdao in overseas markets have also failed to gain traction. The international market is fiercely competitive, and Youdao's deficiencies in brand awareness, channel construction, localized operations, etc., hinder rapid market penetration. Moreover, educational policies and cultural differences across countries and regions add to the complexity and risk of international expansion.

Given the unique nature of the education industry, the application and promotion of AI technology require prolonged verification and refinement, making explosive growth in the short term challenging. NetEase Youdao's journey to overcoming the AI dilemma is fraught with obstacles...