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Stock Analysis: Chegg (NYSE: CHGG)

This article is proudly sponsored by Mike Ivy Comedy, home to one of the best comedians in all of Austin, Texas!

About Chegg 

There’s a few things worth mentioning about Chegg.

First and foremost, it is a pretty savvy business concept, as it can be seen as one big database filled with homework, quiz and test questions and answers for students (typically in high school or college) to tap into and use to “study.”

Why the quotation marks, you might ask?

While we actually do feel as though there is a segment of student users that use the platform to study and actually sharpen their knowledge surrounding a particular subject matter, to the vast majority of others, we simply tilt our heads and give a funny look and say “yeah, right.”

If you’re reading this and have used Chegg in the past or you currently use it, you know good and well that more times than not you’re using it to type in a question and find the answer, and heck, for a company that has discussed how much it helps students actually learn, it is all too easy to type, click and cheat, as it is discussed and pondered by multiple sources across the board.

Nevertheless, it’s a clever business idea, as students can certainly be a desperate bunch and they are usually willing to pay in accordance to their desperation.

Furthermore, when one’s grade is hardly based on actually acquiring and applying knowledge and instead based off of horrifically written multiple choice (remote) exams where you can always seem to confidently narrow it down to two answer choices but then one is just ever so slightly more correct than the other and if you pick the slightly less correct one, you get zero credit, right or wrong, many students will take drastic measures to preserve their grade and not so much their academic integrity.

We get it, I’m sure it is much easier for professors to put exams together and let the computers do the rest and suffice it to say learning in a university setting is far from what it used to be.

Sorry, but it’s a fair statement from my experience.

Our aim here isn’t to knock professors or those that put together exams or course curriculum for that matter, but to highlight the fact that because of all of this, it makes complete and utter sense that a platform such as Chegg exists, whether or not one opts to use it more responsibly (that’s a stretch) while doing homework or in an exam setting.

Calculus - Wikipedia

Nevertheless, to us, Chegg is recession resistant as more and more folks pursue college and as many students become increasingly lazy (this is also a fair criticism) and/or less lazy students incessantly obsess over their grades, greatly inclining them to pay $20 or so each month to Chegg to help them keep or get their grades up in their courses.

This $20 or so gets them what seems like full access to the database where said user can type in a question and find an as close to accurate answer in a matter of seconds, but what is more exciting to our group is how artificial intelligence (AI) is being blended in with Chegg’s core business and operations. 

While this educational technology (EdTech) company’s stock has been absolutely obliterated somewhat recently due to the recent unveiling and perceived threat of OpenAI’s GPT-4 (the company’s stock lost about 50% of its value in a single day), we think these concerns are overblown to a large degree, as Chegg is actually working with the power of GPT-4 and through its collaboration, its new and emerging AI student helper, CheggMate, has been in the works.

A lot think Chegg will be a loser in this AI era, but we disagree and personally view the rise of artificial intelligence and its capabilities as a tailwind for this company moving forward.

At any rate, it’s about that time to learn more about this company’s core financial situation, its margins and other relevant ratios in order to determine, on a strict numbers basis, whether or not this company’s stock (NYSE: CHGG) is worth buying and holding with the view that it is a promising EdTech play.

Chegg’s stock financials

For starters, Chegg’s stock price is trading at $10.06 at the moment, imputing a $1.2 billion valuation for this company along with having a price-to-earnings (P/E) ratio of 5.41 and no annually distributed dividend paid out to its shareholders at the moment, which, per usual with any sort of younger technology company, is to be fully expected, especially as this company needs to preserve more cash in order to finance and further expand its venture into AI.

With respect to the company’s present price-to-earnings ratio, Chegg’s stock (NYSE: CHGG) appears to be well undervalued relative to what it is actually worth (given that it is commonly held that a P/E of 20 implies that a stock is trading at fair value and anything lower indicates that it is undervalued), which is certainly a positive for prospective shareholders and it also makes some sense given the stock’s 50% decline in value over the last year’s span of time.

This could be a massive opportunity.

And it also might not be.

Isn’t investing fun?

Digging a little deeper into this company’s financials, specifically its balance sheet, Chegg’s executives are responsible for taking care of and tending to around $2.5 billion in terms of total assets as well as around $1.4 billion in terms of total liabilities, as of the end of 2022.

It is a resounding positive that this company isn’t overleveraged (i.e., more total liabilities than total assets), however, we do hope that while its balance sheet is in overall mint condition, its executives would put some more capital behind (responsibly, that is, so as to not actually become overleveraged to the point of no return) AI, perhaps through rapidly reinvesting in its core business(es) and its partnership with OpenAI but also through taking a serious look at smaller, lesser known AI-rooted EdTech start-ups that could further accelerate growth for this company and help it stay ahead of the artificial intelligence curve, and thus the competition as well.

Helge Scherlund's eLearning News: What You Need to Know About ...

All things considered, however, as far as balance sheets go, right now (per the latest reported figures) Chegg’s is in good shape.

Onto the company’s income statement, Chegg’s total annual revenues since 2018 have grown for the most part, experiencing a slight yet noticeable flattening between 2021 and 2022 which we will get into momentarily.

Per the specific figures, Chegg’s revenue in 2018 stood at $321 million, $411 million the following year, $644 million in 2020, $776 million in 2021 and basically flatlined to $767 million in 2022.

First, we were happy to see that its revenue rocketed between 2019 and 2020 (likely due to in-person classes being shifted online), as this was a great opportunity for Chegg like a few other companies (Zoom is a prime example) to acquire more customers and strengthen its digital offerings and capabilities.

Additionally, however, it is slightly strange to us that Chegg’s revenue went flat between 2021 and 2022.

Perhaps this was caused by the initial rise of AI and students opting to use other platforms to practically do their homework for them and/or due to the state of the economy and certain students or perhaps their families having to cut back on extra expenses for the time being so as to ensure that they could pay for their rent and groceries along with other necessities and a Chegg subscription just didn’t happen to be very high on that list.

Regardless, we do presume that this company’s revenues will continue rising over the next handful of years, especially if it continues integrating artificial intelligence into its business, as it will more than likely attract more users and also naturally lead to some product diversification which can undoubtedly lead to new streams of revenue for this company.

While some might have initially assumed that Chegg has been bleeding cash over the last handful of years, its net income has been red for a few years, but it has recently turned a corner into positive territory and it’s also worth mentioning that even during some of the years in which its net income was in the red, its total cash from operations were positive during those same years, which is no small accomplishment, especially for a leader in the educational technology segment of the economy.

More specifically, Chegg’s net income (also since 2018) has been continuously whittled down towards positive territory from -$15 million (as reported in 2018) to -$10 million (2019), -$6 million (2020), -$1 million (2021) and has most recently been reported as $267 million in 2022, which, to us, is a huge accomplishment but what is even more important is that this company does what it can to continue this trend, or at least stay out of the red for the foreseeable future as it relates to its net income.

Thankfully, it doesn’t appear as though it is exceedingly difficult for Chegg to generate cash, as can be seen primarily through its total cash from operations figures, as they are also positive and nearly growing each year between 2018 and 2022.

Chegg’s stock fundamentals

It can also be evidenced that this company can produce some cash through its more than competitive trailing twelve month (TTM) net profit margin (as displayed on TD Ameritrade’s platform), as it is listed at 37.85% to the industry’s respective average of -19.91%, which makes some sense given that Chegg was a very early mover in the problems and answers database segment of EdTech along with its well received user interface and solid marketing over the years so as to entice more and more students to put the chicken before the egg, put it together and go with Chegg.

This is a fantastic TTM net profit margin, all kidding aside.

Additionally, also according to the figures displayed on TD Ameritrade’s platform, Chegg’s TTM returns on assets and investment(s) are both greater than those of the industry’s respective averages as well, for instance, with the company’s TTM return on assets towering over the industry’s displayed average of -4.53% to Chegg’s 12.12%.

Should you buy Chegg stock?

Artificial intelligence is a clear positive catalyst for Chegg in our estimation.

With the market share, prowess and clout the platform already has amassed among its younger, student audiences, the more Chegg can continue making student’s lives easier through saving them time and effort with respect to their school work, the brighter the future for Chegg.

Morality, of course, should perhaps play a role in one’s decision making regarding whether or not they consider investing in a company that maintains a platform that is largely marketed as being one that is designed to enhance learning but really, at the end of the day, enables copious amounts of cheating and academic dishonesty, inhibiting one’s ability to actually absorb and learn concepts.

We won’t get into it much more, but one might want to consider this for themselves.

Chegg is sort of like a knife in that sense.

It can be used for both good, practical reasons but also for bad, malevolent causes as well.

Ultimately, from a strict financial perspective, Chegg’s stock (NYSE: CHGG) is evidently undervalued (by a wide margin, we might add), its balance sheet is in a good place, its revenues have been growing for the most part, it is cash flow generative and its TTM net profit margin is absolutely unrivaled in its category, not to mention its TTM returns on assets and investments.

With the deeper integration of GPT-4 into its business, we view this as a major catalyst for Chegg moving forward and with that (among many other previously mentioned factors), feel it is more than fair to give the company’s stock a “buy” rating.

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.

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