Education & Training Services
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CHGG $17
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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. |