Education & Training Services
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CHGG $9
02 May 2023 |
Shares of education services company Chegg are nearly halved after earnings report
One year ago, almost to the day, we wrote about the market’s irrational response to education services company Chegg’s (CHGG $9) quarterly earnings report. On that day, despite beating on the top and bottom line, the company’s shares were plummeting. That had nothing to do with the quarterly results and everything to do with management’s dour guidance. As we write this, it is déjà vu all over again. As the session opened following Chegg’s after-market report, shares were cut nearly in half, falling from $17.60 to as low as $8.72. Once again, the company beat expectations on the top ($187.6M revs) and bottom ($2.2M net income) lines. Once again, it was management’s post-report commentary which sank the shares. Chegg is an online educational resource for students, providing digital and physical textbook rentals, online tutoring, 24/7 homework help, and other student services. The company has “sticky” revenue, in that it charges students a monthly fee (starting at $15.95/mo) for access. With nearly ten million subscribers, the math looks pretty good. Unfortunately, CEO Dan Rosensweig sees a major challenge to the company’s revenue stream on the horizon: AI. Specifically, he sees more students turning to ChatGPT for homework help, which eats directly into Chegg’s core business. In fact, he specifically stated that the artificial intelligence chatbot will have “a direct impact on our new customer growth rate.” Chegg was a $15 billion company just two years ago; it now has a market cap of $1.1 billion. With a strong business model and a single-digit multiple, it should be fine going forward, but it is not for the faint-of-heart investor. The average price target among analysts who cover this company is $18.67 per share, though many may amend those targets down following this recent bloodbath. ValueLine has an 18-month price target band between $13 and $51 per share, while Morningstar gives the company a fair value of $28.13 per share. The price swings have been too crazy for us to touch the company right now. That said, we both like the Chegg business model and believe the AI hype is being overplayed—at least with respect to its near-term disruptive power. |
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CHGG $17
03 May 2022 |
Textbook company Chegg’s market drop following its earnings release was irrational
(03 May 2022) Despite the fact that we like Education and Training Services company Chegg (CHGG $17), we knew it was overvalued when the shares were trading north of $100. Now, after falling some 85%—yes, you read that right—the shares are decidedly undervalued. In fact, one would almost have to assume the company were ready to go out of business to still be bearish at this level, and we expect the company to be around for a long time to come. The catalyst for the pummeling wasn’t rotten numbers for the quarter, it was forward guidance. In fact, Chegg’s revenue rose 2% year-over-year, to $202.2 million in the quarter; and adjusted net income rose 8%, to $50.1 million. Earnings per share easily beat the Street’s estimate of $0.24, coming in at $0.32. Finally, subscriber growth—that wonderful, “sticky” revenue stream—rose by 12%. The problems began to appear when management began talking. Claiming that more people were now focusing on “earning over learning,” CEO Dan Rosensweig warned of rough quarters ahead, lowering full-year revenue guidance from the $830M-$850M range to $740M-$770M. Those figures, and a similar reduction in expected earnings, helped the stock crater to a new 52-week low, falling 30% in one day. Chegg has been aggressively growing its international footprint, offering a direct-to-student learning platform which should continue to increase its market share in a solid industry: education services. While we don’t currently own the company, we believe the shares could easily fetch $35 before long. That would give investors a 100% reward for taking on the risk of owning this small-cap name. |