Based in Santa Clara, California, Chegg (CHGG) is an education and training service provider that supports millions of high school students in choosing their studies and improves their skills when the next step in their career is the job market. People can access Chegg’s services 24/7 wherever they are.
CHGG stock has been under strong selling pressure for the past 12 months as it lost more than 70%, lagging far behind the Dow Jones Industrial Average. This was probably due to the pandemic that may have cooled people’s interest in online courses a bit. However, the effect is likely temporary as the COVID-19 problem is resolving and slowly turning into an endemic situation where we will live with the virus.
Shareholders should not lose patience in this holding, as the company is built on strong foundations, and the outlook for the industry in the United States looks bright.
These long-term factors attribute significant rebound potential to the stock. In addition, the stock is trading significantly below the 200-day moving average of $66.15 per share, which also makes the stock attractive from a valuation standpoint.
Thus, I am bullish on this stock.
Q3 Earnings
Despite significant headwinds from the pandemic, Chegg saw impressive trends in revenue and earnings in the third quarter. Total revenue was close to $172 million, up nearly 12% year-over-year, but falling short of projections by an average of $1.9 million.
Chegg Services’ subscriber base accounted for 4.4 million students in the quarter, up 17% year-over-year.
Earnings were $0.20 per share on an adjusted basis and $0.05 per share on a GAAP basis, exceeding corresponding average estimates by $0.01 and $0.08.
Looking Ahead to Q4 2021
For the last quarter of 2021, Chegg is targeting total revenues between $194 million and $196 million. Based on this level of sales, analysts expect earnings of $0.34 per share.
Industry Outlook and Expectations
During the period of the pandemic, university enrollments declined as the emergency created a kind of economic pressure that forced many young adults to leave classrooms and go to work.
However, the pandemic has also made it clear to many young people that with a high level of education, there are many more opportunities for a well-paid position. Young students can see that those with the highest education are still preferred over most others, even amid tight labor market conditions.
Moreover, those most affected by the health crisis are those on lower incomes, who typically represent the population of low-skilled workers. Think of waiters and shop assistants who work in cafes, bistros, and other small shops. These workers are increasingly being affected by smart working as it disrupts the foot traffic their businesses rely on to keep operating.
So, the market size of the U.S. college & university industry is expected to grow 0.4% from last year to $568.2 billion by 2022 in terms of measured revenues.
Chegg appears to be in the position to capitalize on this outlook, as evidenced by analysts’ forecasts for 2022.
Year-over-year, the education stock is projected to increase earnings per share by 6.9% to $1.32 by 2022, on total revenues of $835.8 million. According to forecasters, total revenue will increase by 9.4% from 2021.
The Financial Condition
The balance sheet is solid. While financial conditions rely more on debt than equity, an interest coverage ratio of 3.8 shows that the company can bear the total cost of its debt positions. The current ratio of 13.6 has so far been the hallmark of strong short-term solvency.
Wall Street’s Take
In the past three months, 13 Wall Street analysts have issued a 12-month price target for CHGG. The company has a Moderate Buy consensus rating, based on five Buys, eight Holds, and no Sell ratings.
The average Chegg price target is $47.82, implying 65.2% upside potential.
Conclusion
The stock has fallen significantly in the past year and now looks like a bargain as it is cheap and has amazing rebound potential.
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