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Low enrollments are crushing textbook supplier Chegg's stock

In this article:
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Jefferies Equity Analyst Brent Thill breaks down the slowdown textbook distributor Chegg is experiencing as sentiment towards the education sector worsens.

Video Transcript

BRIAN SOZZI: Tech shares are getting crushed after warning on the state of the education market. Jefferies analyst Brent Thill covers Chegg and is here for our call of the day. Brent, always nice to see you. So I guess, a stunning decline. I mean, the losses have accelerated throughout the session. What do you do with the stock after seeing it plunge 46%?

BRENT THILL: We don't really see moves like this in our coverage. And so what I would say is that this company has historically been extremely consistent, is very well-run, and is helping the world achieve the mission from learning to earning. So, our view would be, I think this is overdone. The company has over $600 million on their buyback. They can buy 10% of the company back. We think they're going to be aggressive on the buyback.

Certainly, this was not expected. And 10 years of this management team being there, they've never seen this magnitude of a slowdown. And this is, you know, really an industry headwind, not a competitive issue. So if you think about the pandemic, everyone was locked down. You could go to school. You needed help, you went to Chegg. As the world opens, right, and there's a labor shortage-- and we're seeing this in all those companies. Companies are throwing a lot of money at workers.

And so their tradeoff is, do I work right now after I haven't been able to work in the last year or go to school? And so enrollments are down. That's hurting Chegg. Ultimately, the economy is doing well, lots of job opportunities. This will even out over time. So my belief is under $35 here today. For those long-term investors, I think they're going to make money. The stock's trading at like it's a broken tech company. And it is extremely well run by the same management team that's been there for a decade.

So I think this is one of those opportunities where, you know, no one really saw the magnitude of this coming. Clearly, the stock was weak ahead of the print. The trend lines, the visits to their website, we could see the data was softening, but again, I don't think this is the end of Chegg. And that's the way the stock is acting. So historically, when you get a magnitude of a move-- and I honestly have never seen a 47% move down. You typically get an opportunity to take a shot here under 35. And I think for long-term holders, they're going to get rewarded.

EMILY MCCORMICK: Brent, you mentioned that some of the headwinds to Chegg would moderate over time. But one of the things that the company actually did was it lowered its forecast for both revenue and adjusted EBITDA for the full year. And the company didn't necessarily point to any catalyst that would stoke a pickup in enrollment or a return to more rigorous curriculum in the near term. So what do you expect in terms of timeline for that kind of rebound?

BRENT THILL: They tend to look at-- fall enrollment tends to be what happens in spring. So the trend lines don't change. So, to your point, absolutely, there's no near-term catalyst. And that's why I'm saying for long-term investors, that this could be a wash this academic year. Ultimately, I think when you look at the comps that they had, they had massive comps last year. And the enrollment trends like the labor shortage isn't going away.

And the number of job opportunities and signing on-- sign-on bonus. I mean, Amazon mentioned now they're throwing $3,000 bonuses at people just to get them on. And I'm not sure how long you actually even have to stay there. So when you think about that 50% increase in seasonal workers versus going back to school, and I haven't worked in the last year, you're probably going to choose that if you're a working mom or working dad. You've got to make ends meet.

So I think this is really going to be more of a 2022 story. And again, they have a number of other initiatives that are underway that we think can also emerge to help support their core learning programs. So, you know, again, I look at this and say this is more of a call for long-term investors. There's no short-term catalyst. They did say October was getting better relative to September trends. And that's obviously not going to be enough, given the lower numbers.

But remember, in the past, this company started at, you know, 20% plus growth. They've been growing at an incredible rate. And the Street just went to high single digit growth. So I think numbers have been hit hard, unlike Amazon, where the stock hasn't worked all year. And the numbers keep coming down quarter after quarter after quarter. Like, you've got a big cut this morning for most on the Street, including our team. We went from low 20% growth into the low teens.

You know, again, we think this is a team that's been around tech. They're not spring chickens. They know what they're doing. And we think ultimately the quality of this team can get things back on track over time. But again, it's not a short-term call. This is definitely a call over the next one to two years that it's unfortunate. Again, I don't think-- I can't recall the last stock that was down 45% we cover in one day.

BRIAN SOZZI: So Brent, real quickly before we let you go, this is, you know-- Chegg did mention that they view this slowdown as temporary. You would buy into that?

BRENT THILL: Well, the consistency of their results has been incredible. I mean, this was, you know, a single digit stock, you know, six, seven years ago. And it went to-- you know, you can see on the chart where it went to, right? I mean, that's not because of hype. That's because the consistency in the results, right? They're printing, you know, 30% top line growth with a 30% margin. It did it quarter after quarter after quarter, right?

And so this isn't, you know, a flash in the pan. This isn't like some pixie dust where they said, oh, it's amazing. And then, you know, like, the stock went up and they didn't deliver. They delivered. They've been delivering quarter after quarter after quarter. And so, you know, look, I think the industry headwinds for education right now are in. Everyone else in the industry is seeing this. You've seen all education stocks decline. You've seen the multiples decline. It's probably the worst sentiment of all the subsectors we cover.

So what's the rule when you invest? Do you buy at the top when sentiments are amazing or when it's awful? And so my point would be the sentiment is terrible. And, you know, I'm not-- it's not going to get better in the next three months. But ultimately, again, I think, look, for short-term investors, there's probably not an opportunity. For long-term investors, you know, under 35, there probably is.