Chegg: A Lesson in e-Learning

08/23/2017 2:56 am EST


Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

Chegg (CHGG) is a little-known company, but the stock’s had a huge run during the past year, and its rapidly growing business should keep buyers interested, explains growth stock expert Mike Cintolo, editor of Cabot Top Ten Trader.

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The firm has a legacy textbook (and e-textbook) business that’s dragging down overall revenue growth, but the stock is strong today because of Chegg’s on-demand platform for learning (Chegg Study, Chegg Tutors, Chegg Writing Tools) and for helping students find internships, scholarships and prep for the SAT or ACT.

This has always been a huge mass market (47 million people are in middle school, high school or college), and now Chegg has transitioned to an all-digital, higher-margin, subscription-based model.

This move has made all the difference— while total revenues grew just 6% in the second quarter, the company’s service revenue lifted 50%, as the company had 1.2 million paying subscribers.

Beyond that, the firm’s content is proving to be one-of-a-kind, with 200 million pieces of content viewed in the first half, up 60% from a year ago. This story is all about education going online and being more on-demand, and Chegg appears to be helping to lead the way.

The valuation is elevated (63 times this year’s estimates), but given the size of the market and Chegg’s growth trajectory, there’s no reason millions more students can’t become subscribers in the years ahead. It’s an intriguing story.

CHGG’s coming out part came on May 2, when the stock exploded 29% on 18 times average volume following its first-quarter earnings report.

The stock didn’t do anything after that until early July—after testing its 50-day line, it shot above the $15 level before a quick pullback toward $13.

However, another bullish quarterly report pushed the stock back up, and it held those gains last week despite the soft market. If you’re game, you can buy a little around here with a stop near $13.

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