Chegg CEO sheds light on bullish outlook for 2022 (and beyond)
Education technology company Chegg ( CHGG 0.94% ) flourished when millions of students were sent home to learn remotely at the start of the pandemic. Its services are helpful to students whether they are learning in person or remotely. Yet demand surged at the start of the pandemic.
But now that campuses are reopening and welcoming students back to classrooms, Chegg has noticed a temporary slowdown. It turns out students weren’t so keen on returning to school – period – whether from home or in crowded classrooms with a life-threatening virus circulating in uncomfortably high numbers. . In fact, college enrollment has fallen by 6.6% over the past two years.
Despite these short-term trends, Chegg CEO Dan Rosensweig expressed optimism about the company’s prospects at an investor conference on March 9. Let’s see if investors should be too.
Chegg CEO optimistic about company’s prospects
Chegg is an international company, serving students in the United States and abroad. In its most recent quarter (ended December 31, 2021), it had 6.2 million and 1.5 million subscribers from the US and international segments, respectively.
Interestingly, Chegg has attracted international subscribers despite not having the ability to offer country-specific pricing. As you can imagine, this could make it unaffordable for many students from low-income countries who might otherwise purchase a subscription. It’s one of the reasons Rosensweig is optimistic about Chegg’s prospects in 2022 and beyond. By the end of this year, it will have completed the rollout of its local pricing, which it says will drive international subscriber growth for several years.
Another reason for optimism is Chegg’s decision to divest from the physical textbook business. The company was offering this service to students at a break-even rate to deepen customer relationships and possibly acquire additional subscribers. However, students are less interested in physical copies now that digital books are more common. The downward trend and rising shipping costs were the nails in the coffin of Chegg’s textbook business.
The presence of this company has slowed Chegg’s overall revenue growth rates and profit margin. For example, Chegg’s services business has grown from $129 million in 2016 to around $780 million for 2022. Meanwhile, its required materials segment, including textbooks, has grown from 70 to 60 millions of dollars.
Finally, Rosensweig highlighted Chegg’s inherently profitable business model. It has 75 million items of exclusive content in the form of study materials. When students need help, they consult search engines to find their questions. if Chegg has material on the subject, it appears. A few clicks later, Chegg potentially has a new subscriber, and the student has the help they need. No expensive marketing campaign is needed.
Indeed, Rosensweig noted that Chegg’s customer acquisition cost is only $3.50. Chegg’s basic study subscription costs $14.99 per month. It’s no surprise, then, that the company grew its adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) by a compound annual rate of 52% from 2016 to 2022 (based on 2022 estimates).
A good time to buy Chegg
Luckily for investors, short-term headwinds with students reluctant to take college classes on campus are causing Chegg shares to sell low. With a price/free cash flow multiple of around 26, this is the lowest price the stock has sold for in the past five years. If you haven’t already, now might be the time to add shares of Chegg to your portfolio.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.