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Chegg CHGG shares have skyrocketed since its first-quarter results wowed Wall Street on May 4. The company, which began as an online textbook hub, has expanded into a diverse digital educational platform that had already proved it’s poised to grow in a quickly changing learning environment, and then the coronavirus forced everyone to stay at home.
The Chegg 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." This 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, CHGG runs an online internship and job search platform and other tools that aim to help students find employment. And its new pitch is now “A Smarter Way to Student.”
Quick Q1 Overview
Schools around the U.S. and the world closed in an effort to slow the spread of the coronavirus. And despite economies slowly starting to reopen, it is unclear when schools will. More importantly, digital learnings was already becoming widely popular, as college costs continued to soar. “Our belief is that, in every industry, a crisis often accelerates the inevitable and that is what we see happening in higher education,” Chegg CEO Dan Rosensweig said in prepared remarks.
Chegg’s first quarter revenue jumped 35%, with its services sales up 33% to account for 76% of its total revenue. The firm also saw the number of Chegg Services subscribers surge 35% to roughly 3 million. And Chegg’s chief executive said it “saw a substantial increase in new subscribers, both domestically and globally,” as well as a “marked increase in engagement” from its existing subscribers.
CHGG also noted that it was seeing a “meaningful increase in the take rate” of its new Chegg Study Pack much earlier than it expected. And the company forecasted that the momentum it experienced at the end of the first quarter will carry over into Q1, with it calling for its “Q2 subscriber growth to be greater than 45%.”
Before we look ahead, we need to understand what Chegg stock has done. Chegg shares have now soared roughly 40% since its May 4 release, from under $44 a share to new highs of around $62.63—as of late afternoon Friday.
CHGG is up over 65% in 2020, against its industry’s 6% climb and the S&P 500’s 11% downturn. Investors can also see that CHGG stock has soared over 600% in the last five years.
The recent climb has stretched its valuation picture, with it now trading at 13.2X forward 12-month sales estimates. This comes in above its 9.5X median over the last two years. Therefore, a pullback might be in order. But in these uncertain, times Wall Street might remain focused on firms that can grow during the pandemic, especially ones that seem poised for longer-term expansion within a future-looking industry.
With this in mind, our current Zacks estimates call for CHGG’s second quarter sales to climb 45.5%, with full-year sales expected to jump roughly 35% to reach $552.65 million. This would crush 2019’s 28% expansion and 2018’s 26% revenue growth. And Chegg’s 2021 revenue is expected to surge another 23% higher.
Meanwhile, Chegg’s adjusted second quarter earnings are expected to pop 48% to come in at $0.34 a share. Overall, the company’s adjusted fiscal year EPS figures are projected to jump 33% and 22%, respectively.
Chegg’s earnings outlook has improved since it reported, which is no easy task as the coronavirus wreaks havoc on companies big and small. This positivity helps CHGG earn a Zacks Rank #1 (Strong Buy) within an industry that sits in the top 16% of our more than 250 Zacks industries.
Clearly, some investors might want to wait for a pullback after Chegg’s massive post-earnings rally. That said, stocks that can stay above the pandemic fray are likely to prove valuable for some time, from Netflix NFLX to Zoom ZM and beyond.
Longer-term investors might want to consider Chegg as a bet on the future of education becoming more digitally focused, especially as costs and student debt grow out of control.
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