Is Chegg’s share price fairly priced or poised to break out?

Chegg’s [CHGG] share price has soared 157.33% for the year to date (as of 6 April’s close) as the former used-bookseller had transformed into an online education platform.

As the pandemic closed schools and tuition fees rocketed, Chegg provided an educational lifeline for a $20 flat monthly fee. In the past two years, the company has added 2 million subscribers and has partnered with textbook publishers.

In the fourth quarter, Chegg’s total net revenue came in at $205.7m, a 64% increase on the same period last year. Net income came in at $26m, while adjusted EBITDA was $87.9m. In the quarter, Chegg reported 4.4 million subscribers, a 74% increase on the previous year, while for full-year 2020 subscribers totalled 6.6 million, up 67% year-on-year.

“Based on the momentum we experienced exiting Q4 and the strength we are seeing in subscriber growth in early Q1, we are raising our guidance. We expect continued strong growth in the US, and increased contribution internationally where we expect to surpass one million subscribers in 2021,” said Dan Rosensweig, CEO and president of Chegg, in prepared remarks.

“We expect continued strong growth in the US, and increased contribution internationally where we expect to surpass one million subscribers in 2021” - Dan Rosensweig, CEO and president of Chegg

 

For full-year 2021, Chegg expects total revenue to come in between $780m to $790m, while adjusted EBITDA is forecast at $265m to $270m.

 

Will Chegg’ s share price keep gaining?

Chegg is part of the Wells Fargo Discovery Fund [WDSCX]. Managed by Michael Smith and Chris Warner, the fund aims to pick growth stocks that do not depend on wider macroeconomic conditions, even as the wider investment industry is rotating back to cyclical stocks. The fund managers class Chegg as a “core” growth stock, meaning it is capable of three to five years of growth.

Should the Wells Fargo analysts prove correct, now could be a buying opportunity. Over the past three months, Chegg’s share price gains have cooled, with the stock up just 0.93% to close at $90.40 on 6 April. The drop is even more pronounced given that Chegg’s share price hit a high of $115.21 on 12 February, dropping 21.5% since that point.

Simply Wall Street writes that the stock seems fairly valued according to its models (as of 29 March). Combined with a low beta, this means there might not be much room for the stock to grow. While revenue is expected to rise by 77%, Simply Wall Street suggests this is already factored into the current share price. However, given its promising future, Chegg’s share price could be one to keep tabs on should it fall any time soon.

“If you’ve been keeping an eye on CHGG, now may not be the most optimal time to buy, given it is trading around its fair value. However, the optimistic prospect is encouraging for the company, which means it’s worth further examining other factors such as the strength of its balance sheet, in order to take advantage of the next price drop,” writes Simply Wall Street.

“If you’ve been keeping an eye on CHGG, now may not be the most optimal time to buy, given it is trading around its fair value. However, the optimistic prospect is encouraging for the company, which means it’s worth further examining other factors such as the strength of its balance sheet, in order to take advantage of the next price drop” - Simply Wall Street

 

Where next?

So is Chegg a growth stock, like the Wells Fargo analysts believe, or is it fairly priced? The wider disruptive innovation investment theme has gained circa 7.5% over the past month, indicating that companies that gained momentum thanks to the pandemic have been maintaining that momentum.

Whether Chegg’s share price can benefit from this renewed confidence remains to be seen. Among the analysts covering the stock on Yahoo Finance, Chegg’s share price has an average $113.44 target — hitting this would see an 25.5% upside on the current share price. This would see the stock return to the all-time high it saw in February.

A more reasonable target might be around the $92 or $93 level, which the stock hit in March before retreating. Support seems to be around the $81 level, with that level tested twice in March before the stock bounced back.