Wednesday, October 21, 2020

A Small Cap Equity holding: Chegg, Inc. (CHGG, $85.84): “Still Chegg’s Out” by: Ellie O’Donoghue, AIM Student at Marquette University

Chegg, Inc. (CHGG, $85.84): “Still Chegg’s Out”  

By: Ellie O’Donoghue, 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) is a leading U.S. based direct-to-student connected learning platform that focuses on improving educational outcomes by putting the student first in all decisions.

·      In June 2020, Chegg acquired Mathway, a math problem solver tool, allowing for more monetization downstream.

·      Had subscriber growth of 67% year-over-year, including their new Mathway subscribers, allowing them to reach a record 3.7 million students. 

·      Reported a net revenue growth of 63%, year-over-year, in Q2 of 2020 alone. 

·      Management has decided to utilize the immense shift to online learning and reach more students globally with their high-quality low-cost service. 


Key points: 

With the virtual and hybrid schedules still prevalent in school systems due to COVID-19, Chegg’s direct-to-student connected learning platform still ‘cheggs’ all the boxes.  COVID-19 has allowed Chegg to see increased levels of growth because of its nature as a digital direct to consumer company and as an essential need. Although the shift to online learning has been a catalyst to Chegg’s growth, management remains optimistic that online learning is not just a trend, but a legitimate, effective and long-term learning solution. In June, Chegg acquired Mathway for $100 million in cash. With math proficiency being a foundational and critical learning pillar around the world, management sees their acquisition of Mathway as a way to allow for more monetization downstream. With plans to invest in the Chegg Study Pack, Chegg will use their acquisition of Mathway to create future enhancements and continue to provide value to subscribers.  

In addition to their acquisition of Mathway, management has indicated other areas of investment to capitalize on their growth and development due to the shift to online learning. First, management has directed increasing their investment in international growth and development. Management has managed to go from focusing their exposure in five to seven countries to twenty countries due to their optimism in Chegg’s global opportunities. Management has stated how they are seeing subscriber acceleration in Turkey, Saudi Arabia and South Korea and are expecting a large runway ahead of them domestically and internationally. With the majority of their 4 million subscribers being US based, Chegg sees themselves being able to achieve at least 10 million subscribers in the US alone in the future. Chegg is also implementing systems to address account sharing and investing in device management controls allowing them to anticipate continuous expanding margins. 

What has the stock done lately?

With a stellar earnings report in May that proved the assumption that Chegg would benefit off of the widespread shift to online learning, their stock price has continued to thrive. Boasting a $89.92 52-week high compared to their $25.89 low, Chegg’s growth is evident. Although their stock growth has settled since their positive earnings report and Mathway acquisition announcement, they continue to experience incremental growth with a YTD return of 126.43%.

Past Year Performance: 

YTD, Chegg has outperformed the market immensely. While the S&P 500 has seen 9.22% growth, Chegg boasts over 117.30% growth in comparison. Experiencing 63% sales growth this past quarter, Chegg expects total revenue to be between $605 and $615 million, with Chegg Services revenue between $490 and $500 million. In addition, Chegg has continued to reap the benefits of online school, with their subscriber’s growth being 58% yoy in their most recent quarter. 

Source: FactSet

My Takeaway

Since being added to the AIM portfolio on April 20th at $36.75, Chegg has grown to be trading at $85.84 with no plans to slow down. With management still investing in the drivers that were presented when Chegg was originally pitched for the AIM fund, they are still presenting a large growth runway. As Chegg’s platform expands domestically and globally, they will continue to build upon their 87% brand recognition and meet the increasing online needs of students. Due to student’s continued loyalty to their services and Chegg’s investments into creating products to meet a diversity of needs, they will continue to exceed earnings expectations. With the momentum we are seeing in the business, catalyzed by the pandemic, there will be no need for a lockdown browser on Chegg and I would expect to see high margins and high growth in the future. 

Source: FactSet