California-based education technology firm, Chegg [CHGG] found itself in the limelight on WallStreetBets after the company lowered sales expectation by over 18%. As education institutes reopen Chegg’s stock is plagued by the fear that online education which rocketed during the coronavirus pandemic will come crashing down.
Chief executive Dan Rosensweig warned that a combination of COVID-19 variants, increased employment opportunities and compensation, along with fatigue had led to significantly fewer (university and college) enrolments than expected. “Those students who have enrolled are taking fewer and less rigorous classes and are receiving less graded assignments.”
Chegg share price has collapsed 52% since the start of November after it warned that fatigued students were set to batter its revenues. The share price was $29.64 at the 11 November close, down from $62.76 on the first of the month.
The group’s third-quarter report showed that revenues climbed 12% year over year to $171.9m and adjusted operating profit was up 45% to $46.4m.
However, its revenues mark was $1.88m short of analysts’ estimate, and subscriber numbers were also down from 4.86 million in the previous quarter to 4.4 million, although this was still a 17% year-on-year increase. Analysts had pencilled in 4.85 million subscribers.
Struggling enrolment numbers
Chegg now expects to deliver sales of between $194m to $196m in its fourth quarter, down from analysts’ expectations of almost $241m.
According to TipRanks, the company also reduced its 2021 full-year guidance to $763m, 6% below the guidance it issued in its second-quarter results, and then went on to delay any forecast for 2022 until February.
Despite Rosensweig’s assertion that the slowdown was temporary and that in the rest of the world Chegg continued to see very robust subscription and revenue growth, the damage to its share price was done.
Analysts cooled on the stock. The Motley Fool reported that Piper Sandler downgraded its target price from $107 to just $54. Morgan Stanley analyst Josh Baer cut his target price from $88 to $53 as a result of the “concerning commentary”.
Piper Sandler's price target for Chegg, downgraded from $107
Another dark cloud is a lawsuit from educational publishing giant Pearson, which has accused Chegg of breaking copyright law by selling answers to its textbooks on the “Chegg Study” website.
“Ultimately, we believe the challenging (and unpredictable) macroeconomic/industry environment and Pearson lawsuit will continue to weigh on share prices over the near term,” said Berenberg analyst Phillip Leytes, as reported on the Nasdaq.
Personalisation and upskilling
A group of 16 analysts on Market Screener continue to have a consensus ‘outperform’ rating and a $55.54 target price on the Chegg stock.
The reasons for the continued confidence are present in the Chegg third-quarter report. The company has said it is expanding into local markets, personalising content, moving beyond textbook courses and adding non-STEM subjects.
It also highlighted its new partnership with Guild Education from 2022 to take advantage of the increase in the number of employers looking to skill, reskill and upskill their employees in digital technology.
Its international growth is also one to watch as it has already surpassed 1 million-plus subscribers.
“Long-term investors can put Chegg on their watch lists. The company's massive and growing database of content will remain relevant to students for a long time” - Motley Fool's Parkev Tatevosian
Parkev Tatevosian, writing in the Motley Fool, is bullish: “The fall semester was the first that some colleges attempted to bring back students after more than a year of remote learning. Understandably, some may hesitate to return to dorms and classrooms while the deadly virus is still in wide circulation. Long-term investors can put Chegg on their watch lists. The company's massive and growing database of content will remain relevant to students for a long time — even if the market might be overlooking that right now.”
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