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    Chegg Inc. (CHGG) Remains a Buy Despite Its Huge Beatdown, Outlook slumped but Fundamentals Strong

    By Gule Rukhsar

    May 20,2022

    11:39 PM UTC

    The education technology company, Chegg Inc. (CHGG) is currently down nearly 75% in the past twelve months. Despite its strong competitive advantage and fundamentals, the stock is trudging near its lows. A major blow has been the wider loss in the Nasdaq Composite, which is squarely in the bear market territory, down nearly 28% from its November highs. The market has been vastly suffering from geopolitical and economic turmoil as inflation peaks further and interest rates rise.

    However, despite the blows from inflation forcing people to opt for work over education and a slight outlook cut down, the company has been growing revenue. The stock still maintains a “buy” and “market perform” rating from analysts.

    At the latest, the company has launched a Center for Digital Learning as announced on May 19, 2022. The center is meant to enhance online, in-person, and hybrid modalities while also supporting educators. Hence, trading in the green, CHGG was priced at $19.25 a share in the after-hours on Thursday following a gain of 3.94% in the prior session. The stock has been mostly bullish this week with 8.70% gains in the past five days as India’s Byju’s eyes it and 2U for a U.S. acquisition.

    A Quick Look at CHGG

    The education technology company for which tailwinds caused by the pandemic became winners as students turned to it for help with course material. But following the reopening of colleges and the return of students to campus, it has been struggling with declining college enrollment. And the rising inflation is furthering its issues as people’s preference for work outweighs their education amid the economic instability.

    Nevertheless, it has 7.8 million subscribers and has continued to strengthen its competitive advantage. The company has over 79 million pieces of proprietary content that have been created at the request of students over the years. The content attracts new users without the need for much marketing. This results in low-cost customer acquisition as eager students searching for help with homework continue to run through its extensive content database.

    Byju’s Talks

    According to a recent report on Bloomberg, the Indian online education startup, Byju is in talks about acquiring a U.S. target. The highly acquisitive company is interested in taking over CHGG or 2U Inc. for a push into the U.S. education market. I expected the deal to be possibly valued at roughly $2 billion, which Byju’s and its bankers are evaluating from a financial point of view. The article further said that an offer could be made in the coming weeks. The Indian startup is even said to have lined up conditional debt commitments of over $1 billion to finance the acquisition from banks.

    Byju’s has a valuation of $22 billion and is backed by many big names like Tiger Global Management, Chan Zuckerberg Initiative, Silver Lake Management, Nasper Ltd., Mary Meeker’s Bond Capital, etc.

    Financial Overview

    Early in May, the company posted its Q1 2022 financial results, which beat earnings and revenue expectations but missed guidance.

    Source: JBT Corporation

    For the March quarter, the company’s revenue totaled $202.2 million, which grew by just 2% YOY and was also slightly above the consensus estimate of $201.3 million. Expanding 14% YOY was its services revenue, which was 91% of the total. The services revenue was $184.8 million in the quarter. Furthermore, the services subscribers marked an increase of 12% YOY to 5.4 million in Q1 2022.

    The non-GAAP net income was $50.1 million, which rose by 8% YOY and the earnings per share were 32 cents. The earnings per share exceeded the prognosticator expectation of 24 cents for the quarter.

    Adjusted EBITDA totaled $62.2 million in the March quarter.

    CHGG’s Guidance

    While the company entered 2022 with momentum, higher wages and increased living cost are forcing people to choose earnings over learning. Hence, the momentum is seen to be dissipating in the rest of 2022. Thus, the steep inflation hurting demand for education has the company guide for disappointing results.

    For the ongoing quarter, the company expects net revenue of $188-$192 million, which remained shy of the analysts’ expectation of $209 million. With a gross margin of 76-77%, the adjusted EBITDA is anticipated to be between $66 and $68 million for Q2 2022.

    For the full year, CHGG has pegged the net revenues at $740-$770 million well below the previous guidance of $830-$850 million. This also falls below the analysts’ estimate of roughly $844 million. Lowered from $260-$270 million, the adjusted EBITDA is now expected to be $220-$235 million.

    Time to Sell or Not?

    Even though the company has been facing certain headwinds and its robust growth is slowing, CHGG has a cost-light business model with a compelling product. With its constantly increasing content, the offering is expected to only become more stacked and attractive with time. Moreover, the company also has much scope for expansion in its content range as well as markets.

    The recently chopped outlook caused the stock to plummet towards its lowest price in over 4 years and is trading near that figure currently. This brings quite a good opportunity to buy the stock for pennies (metaphorical) over its value. While most experts have lowered their price target for CHGG they still give it a good rating. Alex Fuhrman (Craig-Hallum) downgraded its price target from $35 to $18 while maintaining a “buy” rating. Mike Grondahl (Northland Capital Markets) downgraded its price target from $45 to $27 and “market perform” rating. Brent Thill (Jefferies) downgraded from $55 to $30 with a “buy” rating.

    Conclusion

    While the broader market is suffering, inflation is peaking and learning is becoming less important in the face of earning, CHGG is also struggling to keep its growth pace. However, despite the headwinds, the company remains strong with its low-cost business models and competitive advantage. With a maintained buy rating from experts at its near lows, the stock brings a very favorable opportunity for interested investors. Therefore, it’s not the time to sell but rather stock up on CHGG as it is poised for much growth in the future with a wider scope for expansion.

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