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Bull of the Day: Chegg, Inc. (CHGG)

Benjamin Rains

Shares of Chegg (CHGG) have surged over 15% since the company posted stronger-than-projected third-quarter financial results on November 4. The firm, which began as an online textbook hub, has expanded into a diverse digital educational platform that looks poised to grow in a changing educational environment.

The Notes

CHGG allows students, particularly college students, to buy, rent, and sell textbooks online. Chegg’s tagline used to be “Saving broke students one textbook at a time.” The firm still boasts that people can “save up to 90% on textbooks,” which is a solid niche market in an e-commerce age where Amazon (AMZN) dominates online book sales.

Today, however, the Santa Clara, California-headquarter firm is much more of a learning services-focused company, or what it calls a “direct-to student learning platform.” Chegg offers online tutors, test prep, and other help on everything from math to writing.

Plus, the company runs an online internship and job search platform and other tools that aim to help college students find employment. More recently, Chegg in early September announced that it entered into a definitive agreement to acquire “online skills-based learning platform,” Thinkful for roughly $80 million in an all-cash transaction.

Thinkful, which saw its sales surged 30% last year to hit $14 million, offers customers the chance to learn tech-focused skills such as coding through a “bootcamp-style curriculum and 1-on-1 mentorship.” The company also claims that if its users don’t get a job in tech within six months of graduating, they get their tuition back. That is quite the offer in an age where technology careers are in high demand.

Quick Q3 Overview

As we mentioned at the top, CHGG posted strong Q3 results recently, with revenue up 27% to $94.2 million. The company also saw its adjusted earnings skyrocket over 155% from the year-ago period to $0.18 cents per share to crush our $0.09 Zacks Consensus Estimate.

More specifically, Chegg’s services sales jumped 28% to account for roughly 75% of total net revenues. The company closed the quarter with 2.2 million subscribers, up 29% from Q3 2018. The company also announced that it has a new agreement with FedEx (FDX), and is poised to roll out an upgraded bundle packed called Chegg Study over the course of 2020, with a bigger second-half push during the back-to-school period.

 

 

 

 

 

 

Other Fundamentals

Chegg shares were trading at under $5 in early 2016 and have clearly soared since then to their current price of roughly $34 per share. CHGG stock is up over 25% in the last 52-weeks. With that said, Chegg stock rests 25% off its 52-week highs of over $45 per share after. This could give the stock plenty of room to run despite already climbing 15% in a week. 

On top of that, Chegg is part of our Internet – Software industry that rests in the top 30% of our 252 Zacks industries. CHGG also holds “B” grades for both Growth and Momentum in our Style Scores system.

And although Chegg has been a growth stock and looks poised to expand for years, its valuation picture is not crazy compared to its industry. Chegg is trading at 38.9X forward earnings, which represents a discount against its industry’s 59.5X average.          

Outlook & Earnings Trends

Looking ahead, our Zacks Consensus Estimates call for the online educational firm’s fourth quarter sales to climb 29% to $123.2, which would top last quarter’s 27% expansion. Chegg’s full-year fiscal 2019 revenue is projected to surge 27.3% to reach $408.6 million, with 2020 also projected to jump over 27% above our current-year estimate to touch $520.4 million

At the bottom end of the income statement, CHGG’s adjusted Q4 earnings are projected to jump 24% to $0.31 per share. Meanwhile, CHGG’s full-year fiscal 2019 and 2020 EPS figures are expected to climb 58% and 13%, respectively.

Chegg has also blown by our quarterly earnings estimates recently, including a 49% average bottom-line beat over the trailing four periods. Perhaps more importantly, the company’s earnings estimate revision activity has trended heavily upward since it posted its Q3 results.

 

 

 

 

 

 

Bottom Line

College, as many currently understand it, might look much different and a lot more digital in the somewhat near future as tuition at four-year colleges continue to skyrocket and U.S. student debt climbs above $1.5 trillion. Therefore, Chegg, which is a Zacks Rank #1 (Strong Buy), looks like a solid tech stock to consider at the moment.

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