Shares of edu-tech company Chegg (NYSE: CHGG) tanked 30% on May 3, as the company slashed its full-year guidance.
Chegg feels that many people are giving importance to “earning over learning” due to higher wages and inflationary pressures.
Citing pandemic-induced volatility and unfavorable education industry trends (including a decline in students seeking higher education), Chegg slashed its 2022 revenue outlook significantly to the range of $740 million to $770 million, from the prior guidance of $830 million to $850 million.
It now expects adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) between $220 million to $235 million, down from the previous outlook of $260 million to $270 million.
Financial Snapshot
Chegg’s Q1-2022 revenue grew 2% to $202.2 million, supported by a 14% rise in Services revenue. Chegg Services subscribers increased 12% year-over-year to 5.4 million, with the recently acquired language learning platform Busuu adding 0.6 million subscribers.
Adjusted EPS grew 14.3% to $0.32. Overall, Chegg exceeded analysts’ revenue and adjusted EPS estimates of $201.3 million and $0.24, respectively.
Multiple Downgrades
Several analysts downgraded Chegg stock and lowered their price targets in reaction to Chegg’s dismal outlook.
William Blair analyst Stephen Sheldon downgraded Chegg to a Hold from a Buy and did not assign a specific price target. Sheldon stated, “We continue to believe there could be a wide range of financial outcomes over the next few years but are much less optimistic about the growth outlook from here with growing questions about the factors driving the slowdown.”
Piper Sandler analyst Arvind Ramnani downgraded Chegg to a Hold from a Buy and cut his price target to $21 from $44. Ramnani expects Chegg to “remain in the penalty box in the near/medium term,” as this was the second time that the company lowered its guidance in the past six months.
Ramnani feels that investors will need a “steady trend of beat/raises and enrollment stability to gain confidence in the stock.”
Bank of America Securities analyst David Amiras downgraded Chegg from a Buy to a Hold and slashed his price target to $18 from $45 due to the company’s disappointing outlook.
Overall, the Street has a Hold consensus rating on the stock based on three Buys and 11 Hold ratings assigned in the past three months. The average Chegg price target of $24.30 implies 25.6% upside potential from current levels. Shares have plunged 37% so far this year.
Conclusion
Chegg’s weak outlook has shaken the faith of investors and several Wall Street analysts. With the company mentioning multiple headwinds impacting its performance, investors will await management’s commentary on better trends in the upcoming quarters.
Meanwhile, Chegg expects the ongoing challenges to be temporary and is optimistic about future growth backed by international expansion, personalization of services, expansion of non-academic and skills offerings, and opportunities in language learning via Busuu.
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