A Chance With Chegg

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 |  About: Chegg, Inc. (CHGG)
by: Vladislav Deshkovich

Summary

Chegg offers a unique service to a rapidly growing demographic.

It has little debt and continues to generate more cash from operations.

The company is trading at a low price to book value ratio and may be at a good entry point.

Chegg has great market opportunity as the cost of a college education, and textbooks, skyrockets.

Chegg (NYSE:CHGG) is a unique service catering to college students across the world. The firm provides textbook rentals as well as step-by-step answers to questions from a variety of textbooks. Since 'solution manuals' are usually sold separately from the textbooks that they accompany, the answers to questions found within academic tomes can be considered relatively privileged information. Chegg is still a very young company and has a market capitalization of only half a billion dollars. Since earnings are to be released within a week, there may be potential for profit in the short term. Let's take a look at Chegg's fundamentals in order to make an educated investment decision.

Fundamentals

Chegg's trailing twelve month revenue (an average of the last 4 reported quarters) has been on a steady increase.

Click to enlargeSource: YCharts

Although an increasing revenue is always a good sign, it doesn't mean anything if the company can't pull itself to profitability. A quick look at Chegg's net income (revenue - costs & expenses) shows a different tale:

Click to enlarge

Source: YCharts

Since revenue has been increasing, it's evident that the firm has had to pay a larger amount of money in order to develop and market its product. While this may be worrisome in most cases, keep in mind that Chegg is a young, growth-oriented company. Rising expenses are an unavoidable aspect of growth, although one that the firm must take control over if it wants to push itself to profitability. With that being said, Chegg has actually experienced a decline in its liabilities during the last several quarters:

Click to enlargeSource: YCharts

The firm has also maintained a healthy current ratio (assets/liabilities), indicating that it can readily pay off short term obligations. For a young outfit like Chegg, cash flow is vital. Young businesses often fail to generate enough cash from operations and need to seek financing. This leads to higher debt payments and is the most frequent reason that firms go out of business.

Click to enlargeSource: YCharts

The cyclical nature of Chegg's business model becomes evident from the chart above. That being said, it appears that the firm used financing to acquire cash, but has also continued to expand its capacity to generate cash from operations. In regards to the value of the stock, the chart below shows us Chegg's share price as it relates to the company's book value (assets - liabilities).

Click to enlargeSource: YCharts

As can be seen above, Chegg has been trading at a very low book value for several quarters - potentially indicating a lack of investment within the firm even while it has continued to grow.

Market Initiative

As I mentioned previously, Chegg is a unique firm operating in a market begging for disruption. The cost of a college level education is soaring at the moment; from this, let's assume that the higher price paid in order to receive said education makes the service that much more dear, meaning students will take it more seriously. Chegg costs about $80 a year as of the writing of this article; once more students realize the advantage that they garner from using the service, it wouldn't make sense for them not to invest that little extra capital, since these same students are shelling out tens of thousands for tuition, room and board.

Chegg also sells and rents textbooks. As you can see from the chart below, textbooks are (somehow) also rapidly getting more expensive by the year. The most likely culprit is greedy educators who know the increasing value of a university-level education. Chegg is seeking to disrupt this space by offering unique payment models and licensed 'e-textbooks' for students. This could help students avoid the incredible fees ($250 for a linear algebra textbook, for instance) that they currently pay for textbooks. The money that they spend, although potentially significantly less than they would at the store, should still be enough to propel Chegg farther as a business.

Click to enlarge

Source: United States Bureau of Labor Statistics

Conclusion

Fundamentally, Chegg looks good. Although the company is still young, it offers a unique service and will continue to do so. Chegg should post healthy earnings and undergo appreciation within the next week, assuming it maintains the level of growth that it has displayed during the last several quarters. If you believe in the product, Chegg is a good short term pick up at the moment.

Disclosure: The author is long CHGG. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.