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Summary

  • Chegg Grew Top Line Revenue 15% Compared To Q2 2013.
  • Digital Revenue(The Real Growth Story) Grew 54% Year Over Year.
  • Company Is Projecting Positive Free Cash Flow For 2014.
  • Book Value Provides Some Downside Protection Trading At Roughly Two Times Book Value Versus AMZN Thirteen Times Book Value.
  • Valuation Is Attractive Relative To High Growth Internet Peers At 1.7 Times Revenue.

Situation: Chegg recently announced second quarter earnings which showed strong growth in the digital segment with the company also establishing a partnership with Ingram to expedite their transition to an all digital business. In terms of fundamental analysis, we produced a more comprehensive analysis previously, not reproduced for sake of brevity. We are long Chegg and feel that this quarter is consistent with our bullish position.

Partnership With Ingram A Positive: Chegg's partnership with Ingram(The world's largest and most trusted distributor of digital and physical content) will allow Chegg to have greater free cash flow for the fiscal year and going forward. Chegg is projected to save approximately $25 million in textbook investments in 2014, alleviating concerns about Chegg needed to pursue dilutive financing. Chegg is guiding for Free Cash Flow of $5-$10 million for fiscal 2014. This relationship will increase Chegg's balance sheet strength with the balance sheet projected to increase $10 to $15 million in fiscal 2014. The strong balance sheet will allow Chegg to pursue relevant acquisitions going forward without diluting existing investors with stock acquisitions at their current low stock price.

Catalysts:

  • Further insider purchases
  • Increasing monetization of internship offering
  • New product launches
  • Increased institutional ownership(Recently Par Capital Owned Greater Than 5%)
  • Increased monetization of digital offering
  • Further M&A activity in sector

Chegg Careers And Internships Moving Along:

These sections of the site are gaining traction, with half a million students using the internships and career section over past few months. Chegg CEO even mentioned Linkedin in 2Q earnings call "the more services we get, the more they integrate into a unified experience similar to LinkedIn". Monetizing this area will be the next task, we have produced an analysis of one such opportunity below.

A Premium Job Membership Option Could Produce Strong Returns

(click to enlarge)

Source: Contributor's Analysis

Sum of The Parts: In order to value Chegg wall street analysts have utilized EV/EBITDA multiples on projected EBITDA. We believe this is not the best valuation to use given the disparate nature of the Chegg's two businesses. From our valuation the value of the non-print and digital business was found to equal $7 and the value of the print was computed as $4, yielding an $11 value for the business. The digital business alone justifies the current stock price with investors not paying for the print revenue stream.

Comparable Technology Acquisitions Offer Substantial Upside: The technology sector is a very frothy sector and although not needed for our long thesis to play out, it would not be unreasonable to see Linkedin acquire Chegg in a few years for an enterprise value in the billions to expand their young career offerings and capture job applicants earlier. Recent frothy technology acquisitions include: Instagram, Whatsapp, Tumblr, and Beats.

Risk Factors:

•Limited operating history makes it difficult to evaluate current business and future prospects

•History of losses and may not achieve or sustain profitability into the future

•Business model is uncertain in both print and non-print segments

•Linkedin is a strong competitor and has executed very well within career sector

Source: Chegg Is A Buy On Digital Growth Prospects And Current Attractive Valuation