Chegg Inc (CHGG), an online platform designed to provide an array of products and services to college students and prospective college students, plans to raise $157.5 million in its upcoming IPO. The Santa Clara, California-based firm will offer 15.0 million shares (including 4% insider shares) at an expected price range of $10-$12 per share. If the IPO can find the midpoint of that range at $11 per share, CHGG will command a market value of $977 million,
CHGG filed on August 14, 2013.
Lead Underwriters: BofA Merrill Lynch, JP Morgan Securities LLC
Underwriters: BMO Capital Markets Corp, Jefferies LLC, Piper Jaffray & Co, Raymond James and Associates Inc
Chegg is an online provider of numerous products and services for college students and prospective college students. The firm is certainly best known for its popular textbook sales and rentals. Chegg has approximately 180,000 titles available for rental in its print text library, in addition to numerous others available for sale and over 100,000 eTextbook titles.
The firm boasts an ability to fulfill 90% of textbook searches made on its website. The firm also offers numerous free services to attract college students, including information about colleges for prospective students, information about courses for current students, scholarship opportunities, and a developing social networking-style platform called Chegg Graph, which Chegg hopes will act as a sort of academic Facebook.
For the twelve months ended September 30, 2013, students logged 3.8 million transactions on the online platform and rented or sold over 5.5 million print textbooks and eTextbooks. In addition, some 418,000 students subscribed to the firm's proprietary Chegg Study service.
Chegg generates further revenue through marketing partnerships with some 850 colleges around the United States, as well as popular brands among college students like Microsoft (MSFT) and Red Bull.
CHGG offers the following figures in its S-1 balance sheet for the nine months ending September 30, 2013:
Net Loss: ($50,433,000)
Total Assets: $229,285,000
Total Liabilities: $144,123,000
Stockholders' Equity: ($122,042,000)
Chegg has seen very high rates of revenue growth in recent years; in 2010, 2011 and 2012, the firm generated net revenues of $148.9 million, $172.0 million and $213.3 million, respectively. During the same periods, the firm posted net losses of $26.0 million, $37.6 million and $49.0 million, respectively.
Though we are not aware of any firm that offers a similar breadth of college-related products and services, Chegg has numerous competitors within each segment of its business. Its primary competitors for physical textbook sales include college books stores, many of which are now operated by Follett or Barnes & Noble (BKS), as well as online sellers including Amazon (AMZN), eBay (EBAY), and Half.com.
Competitors for eTextbook business include Apple iTunes (AAPL), CourseSmart, Blackboard and Google (GOOG). The firm must also compete with other college-related brands and the College Board for college enrollment marketing revenue.
President, Chairman and CEO Dan Rosensweig has served in his current positions since 2010. He previously served as President and CEO of RedOctane, a business unit of Activision Publishing, and as COO of Yahoo!. Prior to serving at Yahoo!, he was President of CNET Networks and CEO and President of ZDNet. Mr. Rosensweig also currently serves on the board of directors of Adobe Systems. He holds a B.A. in political science from Hobart and William Smith College.
We rate the Chegg IPO a BUY if it prices in the $9 to $10 range. We would be uncomfortable at the upper end of the range given the firms heavy and consistent losses. We are also becoming uncomfortable with the volume of IPOs in the pipeline.
Despite the entrance of Amazon into the textbook rental business, Chegg has remained a dominant force, and seems to have built sufficient name recognition of its own to stay in the lead in that highly profitable and overpriced market. The firm now reaches approximately 30% of all college students and approximately 40% of all college-bound high school seniors in the United States. Though the firm is not yet profitable, we believe that it has solid potential and that its current lack of profitability is a result of its continued investment into expanding its services and market share rather than any mismanagement.