Is This EdTech Stock a Buy On The Dip?

Chegg, Inc. (NYSE:CHGG) is a US-based educational technology company that first started as a textbook rental platform back in 2005.

Over the years, Chegg has transformed and is now offering its users a complete package of educational resources and services to help students at all stages of their schooling.

The company has already established itself as a major player in the ed-tech market. Through its student-centered online platform as well as mobile app, Chegg has cemented itself as a key platform for students to find educational materials and support at affordable prices.

Over the years, management has reported impressive and massive growth, winning not only the the trust of millions of students from all over the world but shareholders too.

However, in spite of the company’s popularity and future growth potential, shares have been downward spiraling for several months amid weakness in financial performance and competition from AI chatbot ChatGPT weighing in. The stock has slumped by about 60% over the past 12 months. So, will it rebound?

Chegg Won When Learning Went Online

When students migrated online a few years ago, the trend was high favorable to Chegg, which reported a tremendous growth trajectory as the demand for online educational resources and remote learning tools kicked into high gear.

Students from almost every corner of the globe relied on digital textbooks and studying materials as well as the use of online tutoring programs, which helped Chegg rise to popularity.

Chegg reported huge growth in the number of its subscribers as well as their level of engagement, highlighting how popular the platform is among students who need help with their homework, tests, and other forms of academic support.

All those tailwinds supported net revenue in 2020 that rose by 57% year-over-year, and the subscriber base reached a new high of 6.6 million users, a 67% year-over-year growth rate. Also, Chegg saw its market cap more than double in 2020.  The favorable trend continued in the following year.

With the changing needs of students, Chegg added new options to its arsenal. For example, it increased the scope of its adaptive learning technology to deliver personalized learning, allowing students to learn at their own pace in a virtual setting.

Lockdowns speeded up Chegg’s global expansion too, and students from all over the world flocked to its educational resources.

Through partnerships with educational institutions, Chegg further supported the transition to online learning and financials reflected those successes.

Overall, the unique 2020-21 era resulted in a boon that accelerated Chegg’s growth, and spotlighted the merit of edtech in remote learning to support students efforts to acquire the tools and resources needed to graduate.

Why is Chegg Under Pressure Currently?

The availability of AI-driven educational assistance, like instant homework help or tutoring services, are affecting the demand for Chegg’s services.

Now, with chatbots like ChatGPT available to answer questions freely or at low cost, students have increasingly turned their back on Chegg in favor of artificial intelligence to better answer academic questions.

Investors clearly perceive that AI-enabled personalized learning and adaptive learning technologies available in ChatGPT pose a direct competitive threat to Chegg by delivering tailored study plans and educational resources.

Indeed, management acknowledged the impact of ChatGPT on its new customer growth rate last year, which has led to its shares tumbling.

Over the last year, the company reported $716.3 million in total net revenue, representing a 7% decrease compared to the prior year. That stands out as the worst report in recent years.

Likewise, subscription services revenue is also down 5%, with a 6% year-over-year decrease in the number of subscribers to 7.7 million. While 76% non-GAAP gross margin is worth applauding, the underlying reason behind the decrease in subscribers is a viable concern.

On the other hand, AI and machine learning technologies are among the strategies the company is adopting in order to upgrade its services and create customized learning experiences for its students, thus remaining competitive.

Chegg introduced CheggMate last year, an AI-powered learning tool that leverages OpenAI’s GPT-4 model. In its effort to expand its user base, the company has also lowered service prices. Whenever such price cuts are enacted, they reveal the lack of strength in the underlying business model to sustain high prices amid rising competitive threats.

As a result, there is not too much optimism about Chegg’s AI strategy today and management doesn’t expect to reap benefits right away. Plus, there is a lot of uncertainty regarding when revenues and margin growth will tick back up.

Will Chegg Stock Bounce Back?

Among the ten analysts covering Chegg, optimism is high that the stock will bounce back to the consensus target of $7.20 per share.

If the collective view of Wall Street is correct, Chegg has the potential to rise by as much as 48% from present levels.

A further point of comfort for investors is that Chegg is valued at 1.01x forward sales, which is about 88% below the 5-year average of 8.19x.

Also, the stock is currently trading at 6.05x non-GAAP forward earnings, which is roughly 60% lower than its industry average.

Though it’s not yet reflected in the share price, there is hope that Chegg’s stock will rise if its AI approach proves to work efficiently. Nevertheless, the uncertainties about its financial growth and subscriber base expansion are likely to weigh on investors’ sentiments in the short term.

The bottom line is Chegg might very well struggle to regain investors’ confidence without tangible results from its AI initiatives. It needs to develop a solid turnaround strategy soon to win back new investors and must demonstrate it can compete with the AI capabilities of popular chatbots in order to do so.

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