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Textbook company Chegg crashes after earnings guidance amid enrollment drop

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Shares of online textbook company Chegg are crashing amid declining enrollments at American colleges and universities. Yahoo Finance's Emily McCormick explains.

Video Transcript

BRIAN SOZZI: Let's start off on Chegg here. We tease it at the top of the show, a full on pre-market disaster. At one point, it was down 30%, but that sell off is accelerating. The story comes out here and absolutely hammers Chegg's quarter with good reason. I mean, that conference call last night by their team was not good, Emily. Warning about a slowdown in the education market.

The company blaming more people having to go back to work during the pandemic to earn an income. That means they're not seeking out higher education.

EMILY MCCORMICK: That's right, Brian. And some really weaker than expected guidance here. And I think that is really what Wall Street is focusing in on. So not only the fact that the current quarter or the quarter that they just reported had been a little bit light, but the fact that they didn't really point to any meaningful catalysts for the education sector and for Chegg's business overall.

So we saw the company lowering its forecast for both revenue and adjusted EBITDA for the full year. The company now seeing revenue coming in at as much as $764 million. Previously, it saw as much as $815 million. And then, again, on the bottom line, the company seeing adjusted EBITDA coming in at as much as $257 million, whereas it previously saw as much as $300 million for the first quarter.

Now, some really telling commentary here from the CEO of Chegg. That CEO, Dan Rosensweig, saying that, quote, "In late September, it became clear to us that the education industry is experiencing a slowdown that we believe is temporary and is a direct result of the COVID-19 pandemic. A combination of variants, increased employment opportunities and compensation, along with fatigue have all led to significantly fewer enrollments than expected this semester. And those students who have enrolled are taking fewer and less rigorous classes and are receiving less graded assignments."

So, again, we really did also see a slew of Wall Street downgrades on the heels of these results. Piper Sandler lowering the stock to neutral from overweight. Raymond James to market perform from outperform. And Morgan Stanley downgrading to equal weight from overweight here. So, not necessarily a lot of optimism baked in on the street for Chegg and the outlook for the education sector going forward, Brian. And, again, a really ugly sell off here in pre-market trading.

BRIAN SOZZI: Yeah. That can be a pretty session for them. Just want to tie a couple of other things together real quick, Emily. Chegg also not providing 2022 guidance. The street does not like to hear that. Normally on this third quarter earnings call, Chegg provides guidance for the next year forward. They do not do that.

But I will say, I think this is isolated to the higher education market. We heard Newell brands-- and we'll talk later about this with CEO Ravi Telegram. They had a very good quarter for Sharpie markers and pens as kids went back to in-person learning at elementary schools, middle schools, and high schools. So that was good.

Also seeing really continued strength in Apple's iPads, that is a big education focus there as well. And also computer sales, laptop computers have held up pretty well. You look at HP, you look at Dell, they're putting up some good results too. So it does seem to be isolated to that higher education market.