Earnings Could Function As Catalyst For Chegg

May. 1.14 | About: Chegg, Inc. (CHGG)

Summary

Recent acquisition of student deals platform is first of many acquisitions to come.

Management discussion of digital transition could help to correct market's view that Chegg is a "Textbook Company."

View Chegg's print revenue as a floor on the stock price with digital business offering substantial upside.

Recently we released our long view on Chegg (NYSE:CHGG), which can be found here. Chegg is operating in various billion dollar markets and management only needs to execute moderately well for stock to appreciate substantially from current levels.

Business Overview: Chegg is the leading student first connected learning platform, empowering students to take control of their education to save time, save money and get smarter. Revenue streams include: Print textbooks, etextbooks, and student learning solutions (digital).

Bank of America Upgrade: Bank of America recently upgraded Chegg citing valuation and the strong non-print growth. This has been our investment thesis all along and we are looking for a move to $9 in line with Bank of America's price target.

Earnings Catalyst: Earnings can frequently function to correct market perceptions of a stock. One of my long positions in Skullcandy went up over 40% following earnings, once strength in the brand was reaffirmed. Once investors become aware that Chegg is going to be a high margin, digital learning and career business, the valuation will adjust.

Short Thesis:

  • Print growth is lower than expected. Zinch and CheggStudy are relatively new offerings and there is uncertainty about what new services Chegg can offer.
  • Textbook sale and rental is highly competitive and Amazon has started a pricing war. Currently Print textbooks are a majority of Chegg's revenue.

We feel that given the multi-billion dollar market size, strong management team, and strong balance sheet Chegg has amassed that Chegg will be able to grow its non-print offerings through internal development and acquisitions, making within the longer time horizon the physical textbook aspect of the business irrelevant.

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 young recruiting website pathjump.com.