A widespread at-home college experience is the kind of shift that education platform company Chegg Inc. CHGG -2.77% could only have dreamed of.
Chegg is widely known for selling and renting textbooks, but most of its revenue now comes from selling study materials and services to high school and college students, including for online tutoring. Because the textbook business is highly competitive and price sensitive, Chegg’s growth potential is mainly in the latter segment.
While the company has posted solid revenue growth over the past three years, its recent run was remarkable: Revenue in the quarter ended June 30 surged 63% from a year earlier to $153 million and the number of subscribers grew 67%, buoyed by students’ need for support as many schools moved to remote learning. Chegg upped its guidance, and now expects third-quarter revenue to be at least 48.6% higher than a year earlier and full-year revenue to grow 47% or more.
Does Chegg’s guidance look ambitious? Yes. Is it a stretch? Not really. Last quarter’s growth was impressive, but total subscription numbers were 3.7 million—a small piece of the 54 million addressable English-speaking high school and college student market. An extended period of limited on-campus resources only heightens the need for online educational support. The year’s first quarter, coming before the full impact of school closures, saw Chegg notch year-over-year revenue growth of more than 35%.
There are no direct competitors with Chegg’s scale, and certainly not any that own both a textbook business and an online learning subscription service. Having a widely recognized textbook business makes for a relatively easy conversion for subscribers—especially because the latter includes textbook solutions. Most students come to Chegg through web searches or word-of-mouth. As a share of revenue, the company’s sales and marketing budget has declined over the past five years. The cost of a study pack that includes textbook solutions, a function for students to ask experts questions online, a math solver and a writing tool is an affordable $19.95 a month, just $4 more than a Netflix premium subscription.
Even in the unlikely event campuses are able to quickly move back to in-person learning, that wouldn’t meaningfully dim Chegg’s prospects. Since 2014, Chegg has been broadening its subscriber base at a compound annual growth rate of 39.8%, according to a report by Jason Celino, equity analyst at KeyBank. Students across the board can do with some help: Chegg likes to point out that an average college student in the U.S. is 25-years-old and that 40% of college students are employed.
Other angles to examine are Chegg’s well-timed acquisitions and international growth potential. It bought coding boot-camp provider Thinkful in October 2019; a tough job market paired with more time at home only increases the appeal of services that help people acquire occupational skills online. The international market, which is still a small part of Chegg’s business, saw a surprising pick up last quarter even in non-English speaking countries such as Turkey, Saudi Arabia and South Korea.
Chegg’s growth last quarter hasn’t gone unnoticed: Its shares are up 110% this year. But it still trades at roughly 14.6 times forward-12-month sales—not a huge premium to its pre-pandemic trailing multiple of 11 times sales at the end of 2019.
As many parents would agree, growth potential is worth paying for.
Write to Jinjoo Lee at jinjoo.lee@wsj.com
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August 18, 2020 at 08:33PM
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