Chegg: Top of the Class

08/22/2019 5:00 am EST


Glenn Rogers

Contributing Editor, Internet Wealth Builder and The Income Investor

Chegg Inc. (CHGG) provides services and textbook rentals; university costs in the U.S. have soared for years leaving students and their parents with levels of debt that would be unimaginable a generation ago, notes Glenn Rogers, contributing editor to Internet Wealth Builder.

The reality is that the U.S. is gripped in an education debt crisis. About 43 million adult Americans — roughly one-sixth of the U.S. population over 18 — currently carry a federal student loan and owe $1.5 trillion in federal loan debt (figures in U.S. currency).

Chegg has identified this market as an enormous opportunity since students and their parents are looking for ways to save money but also ways to improve their chances of successfully graduating from high school and university.

There are 20 million university students and 16 million high school students for a total addressable market of 36 million that could benefit from Chegg's services. Their entire model is based online, and it is U.S.-centric, so there are no issues around trade.

Since 1997, in-state tuition of public colleges has increased by 243%. The private colleges are worse. A total of 39% of students take remedial courses and 37% of them don't graduate.

Chegg services, which represent 79% of total revenues, are based on study programs, writing programs, math programs, and Chegg tutors. About 21% of the revenue comes from the textbook rental business, which is useful in supporting the brand and bringing students to other services.

Evidently, students are finding the services valuable since they have grown from 300 subscribers in 2012 to over three million last year. Year-over-year growth from 2017 was 38% and the company had a compound average growth rate of 45% from 2012-2018.

Chegg Study has provided 25 million expert answers to students queries and five million step-by-step textbook solution sets. The company's library has over 30 million solution sets and expert answers. Over time, this database will become even more valuable and is a significant barrier to entry for competitors.

Today 64% of high school students are not prepared for college level math. Over 40% of college students must take at least one remedial math or English course.

Currently parents and students are spending over $3 billion annually on remedial courses at the college level. Additionally, parents are spending between $5 and $7 billion a year for tutoring in all subjects. So, it's a big addressable market with an ongoing need.

With continuing education required for retraining due to job losses in many industries, the service has lots of room to grow. Also, the company is well known, with 87% of college students reporting having heard of the company's services.

The company is still in growth mode and revenues are increasing strongly, up 30% year-over-year. Annual revenue guidance was increased to between $398 million and $402 million with an adjusted EBIDA projected to be $121 million to $124 million. The company's gross margins will be 74%.

Recently the company reported second-quarter earnings which beat the street, with quarterly earnings of $0.23 per share. That was a 91.7% increase year-over-year.

The company's stock gapped up over 11% with that news and hit an all-time high of $48.22 in late July. But you now have an opportunity to get back in at a reasonable price. Buy with a target of $55.

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