This is a great time to buy Chegg CHGG cheap because this online-only company operates in a high-growth, in-demand market that has benefited hugely from the pandemic.
Third Quarter Highlights
Chegg reported solid third quarter results with earnings of 17 cents solidly above the Zacks Consensus Estimate of 12 cents on revenue of $154 million that was also higher than the anticipated 144 million.
What’s more, Chegg Services subscribers jumped 69% year over year to 3.7 million while Services revenues grew 72% for a 77% revenue share. The company started out as an online seller of digital text books and later branched out to more personalized learning through courses and services.
In addition, management raised the revenue guidance for 2020 by $100 million and provided 2021 guidance that assumes 23.6% growth from the current year. Both numbers are above average estimates.
These are pretty solid results and the post-earnings sell-off is a bit hard to comprehend. Unless you consider that earnings were down a penny from the year-ago quarter. Management commentary indicated that there was softness on the advertising side (and this softness is actually pretty broad-based across industries). So this may have been the reason.
The results also came along with news about fresh virus cases, which pulled down the broader market and may have had some impact on the company’s shares.
However, this education company is a net beneficiary of the pandemic because of the way it accelerated the move toward online studies, not only in the U.S. but also internationally. So, despite the hit to advertising (which should also eventually recover, following the rest of the digital advertising market), the pandemic staying longer than initially expected is actually positive for both the company and the stock.
Where Valuation Stands Now
On the basis of forward 12 months’ P/E, the shares are currently trading at a multiple of 56.87X, which is below the median value of 91.37X over the past year.
On a forward sales basis, the shares are trading at 17.50X, which is between the median value of 11.47X and the annual high of 19.18X.
Management strategy has played a big role in the company’s success. In particular, the idea of adjusting courses and materials to cater to the most in-demand jobs, retaining high-quality talent with profit-sharing arrangements and adjusting prices where needed to remain competitive have helped the company tap market potential. With international demand also picking up now, this company is going places.
There are currently many stocks worth picking in the Internet – Software industry of which CHGG is a part. But #1 (Strong Buy)-ranked Square SQ, Zoom Video ZM and eGain Corp EGAN are worth a special mention.
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