Chegg stock has collapsed over 50% since the group reported their Q3 2021 earnings report in November. We are always interested when a company pulls back significantly, however it’s always worthwhile to double-check it’s not a value trap. Should I Buy Chegg Stock 2022?

Should I Buy Chegg Stock – About

Chegg provides online research tools, online tutoring services, digital and physical textbook rentals, and other educational resources.

The online services subscription business accounts for over 81% of the group’s revenue in 2020.

Should I Buy Chegg Stock 2022?
CHGG Stock Business Overview

CHGG Stock 2022- Investor Sentiment

You may ask yourself, what do other investors think of Chegg stock? After surveying 164 Investors about their current CHGG shares sentiment: BUY-HOLD SELL, as well as their target price over the next 12-months here are the results;

The results from this survey show there seems to be an undecided investor sentiment on CHGG shares.

CHGG Stock Price

Current Price: $30.69

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Current Market Cap: $4.44billion

Over the past twelve months, the stock price of Chegg has called 55% to trade at today’s price of $30.64. The stock has a 52-week range of $30.59 – $115.21 and currently trades just ~1% higher than the 52-week low.

CHGG has a market capitalisation of $4.44billion

CHGG Stock 2022- Fundamentals

Chegg has a current market capitalisation of $4.44billion. Based on their current share price we can see CHGG stock have a PE of N.A, this means that Chegg is not currently EBITDA profitable.

ValuationMetric
Current Share Price$30.64
Market Cap$4.44 billion
Price / EarningsN/A
Book Value8.03
Earnings Per Share-$0.05
Price To Sales Ratio13.62
Debt1.675b
Equity1.35b
Debt to Equity Ratio123%
CHGG Stock Fundamentals

We can see CHEGG shares currently have earnings per share of -$0.05. Another way of looking at this is the company is losing 5c for each stock.

Should I Buy Chegg Stock – Financials

Chegg has been decently growing its top and bottom line over the past number of years, nearly doubling revenue in the period between FY2018 and FY2020. Typically the 4th quarter result has been slightly stronger for Chegg.

The group in the FY2020 Annual Report had over $644million in revenue. However, many analysts believed that some COVID related headwinds leading into FY2020 enabled the company to report a record result.

The group’s revenue has seemed to be stagnating over the past 3 quarters, from Q4 2020 to now decreasing QoQ into Q3 2021. The group will likely report a record year for 2021, however, it will be interesting to watch the following quarters unfold.

Chegg Q3 2021 Earnings Report

The Q3 2021 Earnings report seemed to be one that investors may not have liked so much with the shares down over 50% over the subsequent days.

Why is Chegg Stock Falling? The group missed the consensus revenue expectations (-1.08%) however still beat the EPS expectations by 4.18%.

CHGG stock in their Q3 2021 reported headline results including the below:

  • Total Net Revenues of $171.9 million, an increase of 12% year-over-year
  • Chegg Services Revenues grew 23% year-over-year to $146.8 million, or 85% of total net revenues, compared to 77% in Q3 2020
  • Net Income was $6.7 million
  • Non-GAAP Net Income was $33.9 million
  • Adjusted EBITDA was $46.4 million
  • 4.4 million: number of Chegg Services subscribers, an increase of 17% year-over-year
  • 229 million: total Chegg Study content views
Chegg Subscriber Numbers

Chegg services have been growing subscriber numbers rapidly since Q3 2019. This seemed to have coincided with the start of the COVID pandemic. The subscriber numbers had been growing at a CAGR of about 54% however over the quarter has declined by about 9.5%.

Should I Buy Chegg Stock - Stock Buyback

In November 2021, Chegg's board of directors approved a $500 million increase to their existing securities repurchase program authorizing the repurchase of up to $1.0 billion of our common stock and/or convertible notes.

At the current market cap of $4.4billion, this would represent over 22% of the shares on issue. This is a substantial share buyback by any means. Typically buybacks have the effect of increasing the stock price. This is due to the reduction of shares on issue and also providing a floor price under the purchased shares.

Over the period of the buyback term, this may have positive upward pressure on the share price. Over the long term, a market is a weighing machine and the full substance of the company will be measured.

Should I Buy Chegg Stock - Peer Comparison

The comparison between Chegg peers it was most appropriate in our opinion to put Chegg head to head with Coursera, Nerdy and 2U. Keeping in mind all the below figures for Chegg are as per the Q3 result whilst others may be using Q2 data.

CHGGCOURNRDYTWOU
Market Cap$4.4b$4.6b$1.35b$2.04b
EPS$0-$1.41-$2.79-$2.18
PEn/an/an/an/a
Revenue
(FY20)
644m293m-774m
Normalised
EBITDA
127m-55m--82m
Price/Sales5.7206.072-2.21
Price/Book3.2796.089-2.27
Peer Comparison Chegg Stock

Chegg's valuation seems to be attractive compared to other peers such as Coursera and 2U Inc. However, it's worth remembering that prior to Chegg trading at $30 per share it was once ~3.8 times larger at over $16billion. Hence this is potentially the reason for such a large fall from grace recently.

One of our principles for investing is not paying too much for future earnings. It happens time and time again where investors time preference becomes too short and their expectations of the future become too bright. The valuation will almost always catch up. This can be seen in the below example of Twitter Stock, and also others such as Amazon in the dot com boom.

TWTR Share Price From 2014 to 2021

From the above, you can see that investors who bought at the peak of greed in 2014, have had to wait many years to start realising gains in the share price again.

This goes to show that investors that are willing to pay massive multiples for potentially higher growth in the future may be left short when the company doesn’t deliver on the growth or hype.

CHGG Stock 2022- Insiders and Ownership

CHGG Ownership Breakdown

Chegg Stock is predominantly held by Institutions at 97.9%. This is a significant ownership stake however means that individual insiders hold a small per cent of the company at around 2%.

CEO Daniel Rosensweig owns approximately 1.2% of the company. It would be nice to see additional insider ownership in the company. Recently covered stock Digital Ocean for example is currently around a $10billion market cap and individual insiders own around 12.5%

CHGG Stock - Recent Insider Transactions
DateValueNameEntitySharesMax Price
22 Feb 21-$29,865,600Daniel RosensweigI300,000US$99.55
20 Nov 20-$2,287,543Robin TomaselloI32,016US$71.45
CHGG Stock - Recent Insider Transactions

CEO Daniel Rosenweig seems to have timed his sale of around $29million worth of stock almost perfectly selling just 14% from the all-time high of around $115. Daniel still holds around a 1.7million shares in the company as of writing.

CHEGG Stock - Top 5 Shareholders
OwnershipNameSharesValue
12.76%Baillie Gifford & Co.18,501,345 $566.9m
8.44%The Vanguard Group, Inc.12,230,810$374.8m
7.78%BlackRock, Inc.11,280,889$345.6m
5.54%Artisan Partners Limited Partnership8,025,922$245.9m
4.2%Wellington Management Group LLP6,089,540$186.6m
Top 5 Shareholders in Chegg Stock

The majority of the top 5 shareholders are all institutional holders. It would have been good to see a few more individual insiders make the list.

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CHGG Stock 2022- Prophets Take

Many investors seem to be pricing this company cheaper than pre-pandemic levels, with the stock price now slightly lower pre-covid. It seems investors may be pricing this company with the mantra of "no-lockdowns = 'no growth'. However, Chegg prior to the pandemic was growing at a decent rate.

We will however avoid the company until it shows signs of increasing growth yet again.

Moving forwards we will be watching CHGG stock for the following KPI's

  • Increasing Subscriber Numbers
  • Introduction of a new service offering such as a integrated course offering
  • Reduction of company debt and improving debt to equity
  • Increasing top line revenue consistent with historical levels
  • Insider buying of shares on market

Without the further acquisition, it's hard to see the future growth case for CHEGG. I remember using CHGG back in my university days, and whilst it was a great help for my studies as soon as University finished the subscription was turned off.

The company seems cheap compared to other peers such as COUR, NRDY and TWOU, investors may have mispriced this over the short term and there may be some upside in the stock. The $1billion share buyback should also deliver some upwards pressure on the stock price.

Should the company look to acquire an online learning platform such as Coursera we may be interested further in the group. However, for the time being, we are happy to sit on the sidelines with this one.

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