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Chegg (CHGG) Q3 Earnings: Where's the Company Headed?

Christopher Vargas

Chegg CHGG is set to report its third quarter results on Monday, November 4, after the closing bell. The software company has lagged behind the broader software market’s 16.1% year-to-date run with its 7.7% gain. The company has been trying to establish itself as an online education presence as well as a helpful resource for students everywhere.

With the online education market open for the taking, Chegg is quickly trying to create a solid subscriber base. The company has had some exciting results in the untapped market thus far. Let’s take a closer look at the company and where they may be headed in the near future.

Can Chegg Crack the Market?

The opportunity is definitely there for Chegg to establish itself as a service that provides students with the resources they need to succeed in their academic careers. Over the past 30 years, textbook prices have increased 812% and in the same time, the average tuition fee has increased 559%. In an attempt to help students with this financial burden, Chegg offers the rental of both physical and digital textbooks.

Chegg’s mantra, "Provide Overwhelming Value to Solve Students' Problems," illustrates the company’s mission to provide true value in a field that has seen its prices skyrocket compared to the rise in wages. Since Chegg was founded in 2005, it has expanded significantly and now offers a wide range of student services, from homework help and online tutoring to internship matching and scholarship searching.

While Chegg is not yet profitable, by acquiring companies such as StudyBlue and WriteLab and expanding its services lineup, it believes it can become cash flow positive in the long term. By offering students a unique and personalized experience at a fair value, Chegg is trying to modernize traditional learning.

Outlook

Chegg anticipates third quarter revenue of $88 million-$90 million, and it aims to achieve a gross margin of 74%-75%. Chegg also raised full-year guidance, upping its revenue projection to $398 million-$402 million, against a prior band of $393 million-$398 million. The organization's full-year gross margin target remains at 76%-77%. The heightened fiscal year guidance in the second quarter marked the 10th consecutive quarter that it has revised its forward guidance higher.

Our Q3 consensus estimates project Chegg’s bottom line to grow 28.57% to $0.09 per share. Required materials is estimated to generate $20.7 million, up 34%, while its services bring in $69.1 million for a 27.5% gain from the year ago quarter. For fiscal 2019, earnings are expected to increase over 38% to $0.76 and revenue is estimated to climb 25.23% to $402.08 million.

The business’ solid financial figures have kept investors optimistic about the trajectory of the young company especially considering its subscription service. Chegg’s subscription service allows students to rent textbooks for a semester at half the cost of buying them. On top of that, the company also offers one-on-one tutoring services in a variety of subjects at bargain prices. At the beginning of this year, Chegg recorded more than 3 million subscribers and in its Q2 report the company said its content had been viewed almost 200 million times.

Takeaway

Chegg’s momentum in 2019 has stoked investors with its solid financial figures and consistent growth. Additionally, Chegg’s current subscriber number is only scratching the surface of the 20 million students in the US alone, meaning the business’ largest growth period may still lie ahead.

The firm’s mission—to bring value to students who find themselves paying the most elevated prices for an education in modern history—is a noble and potentially lucrative undertaking. Chegg sits at a Zacks Rank #3 (Hold) with a Style Score of A in Growth.

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