Learning and education technology provider Chegg (CHGG) walked into a disaster in today’s trading session. The company lost 39.2% in premarket trading, though it has turned some of those losses around. What hit Chegg so hard as to cost it nearly half its value in the space of a day? One word: recession.
I am less bullish on Chegg than I was, but still bullish. Chegg may be able to beat this with a little shift in marketing, but can it pull off that shift before it’s too late?
The last 12 months for Chegg have been pretty rapidly downhill. This is not the first time Chegg has lost a substantial part of its market cap within one trading day. September and October of last year featured a steady decline, but early November 2021 kicked off a nightmare for Chegg, from which it has yet to recover.
The latest news might have inspired a return to glory – until a look at the future followed. Chegg posted its latest earnings report, and the results were mixed. The company posted a win on earnings, coming in at $0.32 per share against a Zacks estimate calling for $0.25 per share.
However, revenue proved a miss. The company posted $202.24 million in revenue, 0.36% shy of Zacks’ projections. Additionally, the company cut its full-year forecast, citing issues of recession, inflation, and more.
Wall Street’s Take
Turning to Wall Street, Chegg has a Moderate Buy consensus rating. That’s based on four Buys and nine Holds assigned in the past three months. The average Chegg price target of $27 implies 53.2% upside potential.
Analyst price targets range from a low of $18 per share to a high of $45 per share.
A Mixed Package for Investor Sentiment
Checking out investor sentiment around Chegg reveals a profoundly-mixed package. There’s almost a positive development for every negative at this point. Some of the positives are even a bit negative, depending on how you look at them.
A major plus for Chegg investor sentiment comes from hedge funds. The TipRanks 13-F Tracker reveals that hedge fund involvement with Chegg nearly doubled in one quarter, going from around 3.8 million shares to around 6.8 million shares.
However, retail investors—at least those who hold portfolios on TipRanks—turned in a much more negative assessment. In the last seven days, TipRanks portfolios holding Chegg fell 1.1%. In the last 30 days, portfolios with Chegg dropped 3.4%.
Meanwhile, insider trading straddles the line. In the last three months, there have been positive signs, as buy transactions led sell transactions 10 to five. In the full year, however, that shifts to a much closer figure: 25 buy transactions to 22 sell transactions.
Finally, there’s the comparatively neutral matter of Chegg’s dividend history. Specifically, it has none. Though for many investors, that’s less a neutral matter than it is a negative one; no dividend at all isn’t encouraging to many investors out there.
A Possible Path Forward
Essentially, Chegg is cutting its outlook because of a reasonable point. Customers are likely to put a lot more time and effort into trying to land work than they are studying. Potential Chegg customers will likely be focusing on “earning over learning” and thus, will cut back accordingly. It’s worth noting that even Chegg expects this to be a temporary condition.
Better yet, Brent Thill, an analyst with Jefferies, pointed out that Chegg will likely be able to “…pass along price increases to U.S. subs with minimal churn, providing a future growth catalyst.”
That’s not out of line. However, the key wrinkle here that could turn things around for Chegg is if it can more aggressively point out how much learning goes into earning. The two are intrinsically connected; they’re almost the same word, separated by one extra consonant.
In fact, it’s nearly impossible to get one without the other. Credentials are vital for producing earnings. Certifications, degrees, passed courses – all of these are vital to earnings on one level or another.
The more that Chegg can focus on this point—don’t pursue earning without the learning—the better it’s likely to survive the upcoming recession overall. Chegg is right to be concerned; customers cutting back in the face of fewer available jobs will likely mean less spending on education.
Customers will, so to speak, go to war with what they have. Nonetheless, if Chegg is able to convince customers otherwise—perhaps by commissioning studies or the like—it may be able to position itself as a recession-beater.
Concluding Views
It’s a safe bet that Chegg will suffer for at least a while. Even if there is a marketing-based plan forward, and even if it works, it will still take time to set up. Studies don’t conclude overnight. Research isn’t the work of minutes. Chegg stock will likely take hits in the meantime.
However, the company has decent sentiment on its side. The company is trading below its lowest price target. There’s plenty of upside potential here and even a potential path through a possible recession ahead.
Chegg customers might be more focused on earning over learning right now. However, if Chegg can show that it takes learning to make earning happen, it turns the entire narrative around in its favor. That’s why I’m still bullish – although a bit less bullish than before.
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