Chegg's Diversification Puts IPO On Investment Radar

| About: Chegg, Inc. (CHGG)

Once known as a textbook renter, Chegg (NYSE:CHGG) has transformed into a huge online portal for high school and college students. The company's diversification away from renting textbooks makes this IPO one worth watching.

Chegg is set to price its initial price offering this week. The company is selling a total of 15 million shares (14.4 million from the company, 600,000 from a shareholder) at an expected price range of $9.50 to $11.50. There will be a total of 86.32 million shares outstanding after the offering. The proceeds from the IPO will be used to pay off a $31 million existing borrowing and general corporate purposes.

The company uses its "Students First" motto to promote several offerings available to high schoolers and college students. Over the last 12 months, seven million students have used the Chegg platform. An additional 1.2 million students have used a Chegg service on a mobile device. The company believes it reaches 30% of college students and 40% of college bound students.

Chegg's main service is renting and selling textbooks. The company has over 180,000 titles available in print and 100,000 available as eTextbooks. In the last 12 months, Chegg has sold 5.5 million print and eTextbooks. Chegg has partnerships with over 850 universities. Chegg faces competition from Amazon, Follet, Barnes & Noble, and eBay.

Chegg is boosting its revenue base away from textbooks. At the time of the company's prospectus, Chegg had 418,000 subscribed to its Chegg Study service. Chegg Study is offered at a price of $14.95 per month or $74.95 per year. The company has boosted its additional services though several acquisitions. In 2010, Chegg purchased Cramster, a leader in online homework help. In 2011, Chegg bought Zinch, a college admission and scholarship help site.

In 2012, non-print products made up 13% of Chegg's revenue. In the last nine months, that figure has jumped to 20%, as Chegg continues to boost its additional offerings. This is quite the transformation, considering non-print revenue made up less than 1% of the company's total in 2010.

Here is a look at several offerings from Chegg:

· Print textbooks

· eTextbooks

· Supplemental Materials

· Chegg Study

· Textbook Buyback

· Courses

· College Admissions and Scholarships Services

Chegg's strengths:

· We put students first

· Our business model has powerful network effects

· We have leading brand recognition and trust

· We enable discovery and personalization of student-related services

· We have a robust technology platform

Chegg's strategy:

· Continue to build the Chegg brand

· Expand reach with college students, high school students and lifelong learners

· Adding new services and content to better serve students

· Increase monetization of marketing services

Another key source of revenue for Chegg is its advertisers. The company has key relationships with Microsoft, Red Bull, and American Express.

Here is a look at Chegg's revenue:

Digital Platform


Net Loss


$148.9 mil

$26.0 mil


$172.0 mil

$37.6 mil


$213.3 mil

$49.0 mil

9 Months 2013

$178.5 mil

$50.4 mil

9 Months 2012

$145.1 mil

$57.2 mil

Click to enlarge

As you can see, Chegg continues to lose money each year. Revenue has increased nicely each year and should continue to climb as the company enters new revenue markets. In the last nine months, print revenue increased 13%. Non-print revenue was up an astonishing 95% in the last nine months. These two increases gave the company a total increase of 23% in the last nine months.

To me, the company is winning through diversification. More high school students are learning the Chegg name and using the site to apply for college and scholarships. Students are then using Chegg to rent or buy textbooks and going back to the site for study help. In total, students are sticking with Chegg for a four to six year period as they transition from high school to college.

Chegg has transformed the textbook rental market with its products. The company faces heavy competition, but should be able to weather the storm with its additional services and offerings. After all, Amazon and eBay don't offer students help with courses or homework after they purchase a book online.

I would be a buyer of Chegg shares under $12. I believe this could be a high demand IPO, as the company is selling a small portion of the total shares. This does also open up the risk of many lock-up sales later down the road.

Investors looking to get into Chegg before the IPO should consider buying shares of GSV Capital (NASDAQ:GSVC), a company I have recommended buying before. GSV has of course been in the news for their large stake in Twitter (NYSE:TWTR), which just went public. The investment company also owns a stake in Chegg.

GSV reported third quarter earnings on Monday. The company saw its net asset value rise to $13.16. The company's largest stake was a $44.8 million stake in Twitter, good for 17.6% of net assets. Chegg was the fourth highest stake for GSV Capital. GSV has a $14.1 million stake in Chegg, which represents 5.6% of net assets. The company, who has seen shares trade between $6.84 and $16.90, could see a boost with a strong IPO from Chegg.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CHGG, GSVC over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.