Wednesday, November 11, 2020

A Small Cap Equity holding: Chegg (CHGG, $72.88): “Don’t Cheat on Chegg” by: Madi Daleiden, AIM Student at Marquette University

 Chegg (CHGG, $72.88): “Don’t Cheat on Chegg”

By: Madi Daleiden, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


  • Chegg, Inc. (NYSE:CHGG) provides a digital learning platform and supplemental education solutions for students by offering textbook rentals/purchases, test prep, and other services.
  • Chegg shares’ 120% increase post-March trough evidences the demand for Chegg products in an increasingly digital education environment.
  • New technology and international investments will sustain high top-line growth.
  • E-learning market expected to reach nearly $400 billion by 2026 with a CAGR of 9.5%.
  • Strong brand recognition among core student demographic will undergird these growth opportunities and capture market share.
  • Since 10/26/2020 Q3 earnings, stock is down 15% in near-term, but long-term growth prospects remain favorable.  

Key points: After recording tremendous gains post-COVID-19 shutdowns, Chegg has lost short-term momentum following a year-over-year earnings decline.


Since its entrance into the AIM equity fund in April 2020, Chegg has been a top-performer with a total return of 106%. The stock’s high returns derive from COVID-19 catalysts—like the transition to online learning—and firm-specific drivers—like technology investment and international expansion. 


After the mid-March sell-off and original surge of WFH and online education transitions, Chegg’s share price has increased ~120% YTD. As schools transitioned to online and/or remote learning, students lost on-campus support and ease of Chegg account sharing. As a result, during Q3 2020, Chegg recorded 3.9 million service subscribers representing a 69% increase in year-over-year growth. Given the uncertainty of future learning environments, Chegg will remain a primary beneficiary of these shifting education trends as exacerbated by COVID-19.  


Chegg will maintain this subscriber growth through its newly implemented technology to mitigate “account sharing.” Originally planned for 2021, investments in this “device management” technology were accelerated by COVID-19 and limited proximity sharing in the U.S market. This restrictive technology encourages users to open accounts independently and thus driver greater subscriber and revenue figures. 

With international market expansion as a key driver of Chegg’s original buy recommendation, Chegg’s international growth is accelerating due to increased engagement during COVID-19. Chegg has been successful integrating the international audience in recent months as 25% of engagement with their Expert Q&A—one of Chegg’s most popular services—derived from international sources. By mitigating account sharing and investing in international integration, Chegg can sustain its high growth of subscriptions and overall revenues.


The e-learning support market is expected to reach $398.15 billion by 2026 with a CAGR of 9.5%. IBISWorld estimates that Chegg currently captures ~6.6% share of this minimally concentrated market. Chegg benefits from a strong brand recognition and positive product sentiment among college students, its core demographic, since 87% of college students have heard of a Chegg service and 92% of them believe Chegg Study helps them get better grades.

Given its strong brand identity and positive product sentiment, Chegg is well-positioned for its technology and international investments to contribute to greater market share growth.  


What has the stock done lately? Chegg recently reported its Q3 2020 earnings on October 26, 2020. Chegg beat expected earnings by 42% ($0.17 per share exceeding $0.12 estimates) and provided encouraging guidance for Q4 4020 and FY 2021. However, it’s adjusted earnings declined 6% year-over-year. Due to the market’s sell-off in response resurging coronavirus cases and this year-over-year earnings decline, Chegg’s share price has dropped 15% since its earnings release.


Past year performance: Chegg is up over 94% while the Russell 2000 is down nearly 4% YTD. This stock was pitched on April 17, 2020 with a price target of $47.27 and has delivered a portfolio total return of 106%.

Source: FactSet

My takeaway

Although the stock has endured recent, short-term market losses, Chegg has been a top-performer within the AIM fund and its long-term, top-line growth is expected to continue. With online and hybrid education models expected to become the “new normal” post-COVID-19, Chegg will continue to capitalize on students’ need for extra academic support. Its technology investments and international expansion, as perpetuated by its strong brand recognition and positive product sentiment, will continue to drive firm performance and market share. Given its 52-week high at $89.99 and analysts’ mean consensus at $95.79, Chegg’s current share mid-seventies share price offers plenty of room to grow. 

Source: FactSet