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Why Chegg Stock Will Keep Chugging Higher

Dana Blankenhorn

A profitable quarter and solid guidance for 2019 sent Chegg (NYSE:CHGG) stock to an all-time high overnight. So what exactly has investors hyped about Chegg stock?

Let’s take a look.

The company, which rents textbooks and provides online help to college students, reported a fourth-quarter profit of $5.3 million, 4 cents per share fully diluted, on revenue of $95.5 million. The shares went up 10%, to over $38 per share, thanks to strong year-over-year growth and hope it will do even better in 2019.

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Full-year revenue was $321 million, up 26% over 2017. CEO Dan Rosenzweig said he expects 2019 revenue of $390-395 million, up 22%, most of it in the form of services revenue with gross margins of about 75%.

A Lasting Pop for Chegg Stock?

CHGG investors reacted like they had just discovered the company, which in a way they had. Before earnings, CHGG stock had a market cap of under $4 billion. But it has the kind of stock chart you dream about, a string of gains that started in spring 2016, at a little over $4 per share, and were interrupted only once, by last fall’s tech wreck.

Since dropping from an August high of over $32 per share to an October low of a little under $24 per share, CHGG stock has renewed its march upward. Patient investors have been handsomely rewarded.

To its customers, Chegg’s offer doesn’t seem to have changed much. How it delivers its main service of textbook rental has. An alliance with Ingram signed in February 2015 let Chegg offload the inventory risks of moving books. A 2017 alliance with Pearson (NYSE:POS) let it move entirely to a “rental only” business model.

The result is that most of the company’s revenue today comes from online tutorials, its latest acquisitions being companies like Math42, WriteLab and StudyBlue. It’s also said to be a good place to work, one that puts students first.

A Changing Business Model

The rising cost of textbooks, and the rise of online resources to buy and rent books has changed how students acquire them. It also opened students up to new online resources like Chegg’s tutoring services, college selection services and internship help.

Offloading inventory risks lets CHGG increase profitability at a cost to its revenue base, and 2018 was the first-year revenue beat 2014’s $304 million. But that higher 2014 revenue also saw a loss of nearly $65 million, while 2018’s record saw net income of $5.3 million, $31.8 million when non-GAAP measures are used.

Analysts have been warming to the ability of Chegg stock to beat street estimates on revenue and income. The steady gains also pushed Chegg, worth less than $500 million a few years ago, into a more investable category. If it hits earnings targets this year, it should be worth well over $5 billion by the end of 2019.

The Bottom Line on CHGG Stock

Chegg’s success in an online business model, along with small, smart acquisitions, make it a different proposition to the old textbook rental business.

Chegg has stabilized the balance sheet. That now shows over $450 million in cash and short-term investments, against just $7 million of long-term debt. Another $283 million is held in convertible senior notes, which may turn into equity and strengthen the balance sheet further.

The success and stability of Chegg stock could also make it an attractive buy-out candidate. There have been no rumors to that effect, but its relationships with students might look very good to an Amazon (NASDAQ:AMZN) or even to Pearson, with which it already does business.

Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in AMZN.

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