Chegg (NYSE: CHGG) Pullback Provides Attractive Entry Point

A couple of months ago, I recommended buying Chegg NYSE: CHGG on an explosive breakout to around $68 a share. Shares of the education platform quickly ran up more than 20 points, before stalling out.

Now, after pulling back for a few weeks, CHGG is trading around the 50-day moving average.

Following my previous analysis, Chegg reported blockbuster Q2 numbers in early August. But now, after the pullback, you can get into Chegg at a very attractive price – only a bit more than you would have paid in mid-to-late June.

Chegg Growth Accelerated in Q2… Again

In Q1 2020, Chegg’s revenue growth accelerated for the third consecutive Q1. Q2 2020 can’t match Q1 in that regard but was even better in other facets.

In Q2, revenue increased 63% yoy to $153 million, with subscribers increasing 67% yoy to 3.7 million. Wall Street had expected revenue of $137 million. In Q1, revenue grew 35.1% yoy, with subscribers increasing 33% yoy.

The 63% yoy revenue growth was an acceleration over the 26.5% yoy growth in Q1 2019, which followed 31.8% yoy growth in Q1 2018.

Earnings also came in higher than expected, jumping 61% to 37 cents a share vs. expectations of 34 cents a share.

Chegg’s guidance for $140-$145 million in revenue for Q3 came in above estimates for $121.8 million.

Chegg received upgrades galore following the earnings release:

• Morgan Stanley increased its price target from $83 to $96.
• Needham boosted its price target from $70 to $100.
• Raymond James upped its price target from $60 to $93.
• KeyBanc increased its price target from $86 to $100.

Chegg is Ahead of the Curve

On its Q2 2020 earnings call, CEO Dan Rosensweig noted that Chegg has been ahead of the curve:

“In 2013 at the annual ASU GSV Summit, the premier education technology conference, we addressed the need to leverage data to personalize the learning experience to better serve students. Three years later, our keynote entitled “The Class of 2020” predicted that higher education was the next bubble to burst and that institutions would experience irreversible declines if they continued to raise prices while delivering an antiquated product. We made impassioned and specific recommendations to aggressively transition to a model that moved higher education online, leveraged technology to make learning available to students 24/7, and to expand and modernize their content to be more relevant to the modern workforce.”

Some of the biggest complaints about higher education in 2020 is the:

• Ridiculously high cost.
• Difficulty of walking into a quality job that offers a good ROI.
• Lack of leveraged technology.

Chegg’s products help to solve all of those pain points.

Focused on International Expansion

Back in June, I noted that international expansion gives Chegg huge upside.

So hearing Chegg say “we are increasing our investment in international growth and development” on the Q2 earnings call is music to my ears.

Taking Steps to Stop Account Sharing

On the call, Chegg noted, “we are implementing systems to address account sharing and investing in device management controls.”

Account sharing is a significant challenge for countless online subscription companies – including Chegg. However, while many people may balk at paying for their own subscription from many of the others, Chegg is commonly viewed as an amazing value.

Chances are, few customers will abandon the service if they are forced to choose between buying their own subscription and no longer using Chegg.

Consider Getting in Now

Chegg is offering a solid entry point right now that offers a clear place for a stop order.

You may be thinking:

Didn’t Chegg breach support? It’s currently trading below the 50-day moving average.

 To that, I say that even when stocks get support at the 50-day or 200-day moving average, they often dip a little below the line.

Also, context is key – Friday’s move came on below-average volume. If, alternatively, Chegg had plunged 7-8% on Friday on triple its average volume, I’d be concerned.