Chegg Could Double

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


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.


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