How Should You Play Chegg Ahead of Q4 Earnings?

Chegg NYSE: CHGG, the education platform, is set to release its Q4 earnings today after the bell, and shareholders are hoping the market reaction is better than last time.

Last time, Chegg shares dipped by more than 11% on earnings as management said to expect growth to slow in 2021. And that was two weeks before the vaccine news came out. Chegg shares went down another 10% on that news.

CHGG bottomed out the next day, and has come roaring back over the last three months. Shares are up 47% since November 9 and sit just shy of all-time highs.

Are Chegg shares going to get shellacked again? Or will it be different this time?

Let’s start by looking at why shares dipped last time.

Chegg expects to grow revenue by over 50% for full-year 2020, but said that it sees revenue growth coming in at around 24% in 2021. With shares trading at around 60x forward earnings at the time, investors were understandably spooked.

But dig deeper, and there is less reason for concern. Chegg’s revenue increased by 26% in 2018 and 28% in 2019. The pandemic was a huge tailwind in 2020; it would be unfair to expect Chegg to keep growing at 2020 rates moving forward.

The 24% projection is impressive in some ways. Chegg is going to face tough comps this year and likely experienced a pull-forward effect in 2020, where prospects who would have started using the service in 2021 instead started using it in 2020 due to the pandemic.

Some would argue that shares have gone up a lot and unrealistically high expectations were priced in. They would say it doesn’t matter what can reasonably be expected.

But Chegg shares aren’t that expensive. The stock is currently trading at 62.6x forward earnings. In 2022, revenue is projected to grow by around 21% and EPS is expected to increase 26%.

The thing is, Chegg is still just scratching the surface. Revenue and earnings could grow at a 20% CAGR over the next 5+ years.

 Chegg has a massive addressable market. There are over 36 million high school and college students in the US. And Chegg is also expanding internationally. At last count, Chegg has 3.7 million subscribers, which is just over 10% of the US addressable market. If you consider the global market, Chegg is likely being used by less than 5% of its potential customers. As an industry leader, Chegg could grab a much larger piece of the pie.

Pricing Power and End of Account Sharing Offer Additional Upside

 Acquiring new customers isn’t the only way for Chegg to increase revenue. It should have no problem raising prices and getting more existing users to pay for the service.

Chegg is seen by many users as an amazing value. Its tutoring rates are often a fraction of what competitors charge. A Chegg subscription costs around $15-20. Students – or maybe more accurately, their parents – are willing to pay a lot of money for learning tools. Chegg could likely charge $25-30 or more for its subscriptions and its customers wouldn’t blink.

Chegg has struggled with account sharing for a while – like a lot of online subscription companies – but the company is fighting it. The danger of fighting account sharing is that companies can lose users that don’t like the service enough to pay full-price for their own subscription. That is less of a danger for Chegg, however, due to that amazing value it offers.

The Analysts Like Chegg

Several firms raised their price targets on Chegg in January:

• KeyBanc from $100 to $120.
• Bank of America from $100 to $115.
• Needham from $100 to $115.
• Barrington from $95 to $110.

The highest price target ($120) is just 17% above Chegg’s current share price, which suggests that the stock’s short-term upside may be limited.

How Should You Play Chegg?

There is a lot of reason for long-term optimism with Chegg. But shares are extended in the short to intermediate-term. It is unlikely that the stock gets clobbered again on earnings, but there seems to be more downside than upside this week.

Your best bet may be to wait for a post-earnings pullback.