Chegg Could Double

Mar.13.14 | About: Chegg, Inc. (CHGG)

Summary

CHGG's transition away from textbook sales and rental offers substantial growth for investors.

Margin profile of CHGG likely to improve dramatically with non-print transition.

Valuation is acceptable at current levels given revenue growth profile.

Why Chegg (NYSE:CHGG) Is A High Conviction Small Capitalization Idea: I recently sold my stake in Skullcandy, I had written a seekingalpha article on it a few months ago since then it has doubled. I view Chegg in a similar light, the company operates in a multi-billion dollar market similar to the headphone market, Chegg's market being online recruiting and education. Chegg has been a shareholder nightmare since its IPO (Similar to Skullcandy) but at these depressed levels, I am finally a buyer. I am holding this as a long-term investment in the change from print learning to digital learning and from offline to online college recruiting.

Valuation is unassuming at current levels. I sat on the sidelines during the IPO at $12.50. Amazon trades at 46 EV/EBITDA by comparison, applying a heavily discounted EV/EBITDA of 25(Significant discount to other high growth internet companies) to estimated 2015 EBITDA of $30 million I arrive at a $12 price target. I am conservative and am only looking for a move to $9 before I close my position, a return of 40%.

My previous article with a more thorough analysis is linked here for reference.

Key Insight Market Is Missing:

In long term Chegg will no longer be a textbook rental and sale company. The company will be driven by its non-print products and services which have much higher margins(65% gross margins from calculations versus 26% currently).

What is the non-print business:Cramster(online homework help), Zinch(college admissions and scholarships), and the largest opportunity advertising and promotions(for example, for Red Bull, Chegg inserted a free can of redbull in select textbook shipments). The advertising opportunity is huge given the data Chegg is collecting on the valuable college segment.

Catalysts:

Expect some volatility with this stock as the transition is underway and the company shifts its revenue streams.

Disclosure: I am long CHGG. 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.

Additional disclosure: I run a company in the young recruiting sector pathjump.com