Chegg (NYSE:CHGG) is a company that specializes in online textbook rentals, homework help, online tutoring, scholarships, internship placement and more. The company caters to high school and college students.
I really like Chegg's story. As a student myself, I can attest to the business. If a student has trouble comprehending a concept from a Chegg-bought textbook, they then turn to the internet, only to come to Chegg for more help.
Its products are popular and very sticky. No other company has built a platform like Chegg's: one that is focused exclusively on the needs of students. The company reaches over 50% of all U.S. college students and over 75% of high school seniors.
Moreover, I think that people are starting to see the value of the education space. Barnes & Noble (BKS) just spun off Barnes & Noble Education (BNED), which allows the latter company to focus on the educational side of the business. As previously stated, no other company has built the kind of platform that Chegg has. Barnes & Noble Education may take some market share from Chegg, however, I don't see the company ever stealing users from Chegg's online platform.
Chegg is partnered with Ingram (IM), the world's largest distributor of content. It distributes to over 38,000 retailers, including libraries and schools. By 2016, Ingram will be fully responsible for the warehousing and logistics of all textbooks in the Chegg catalogue. This is projected to save Chegg $6-8 million annually.
On Chegg's Q2 conference call, CEO Dan Rosensweig talked about the partnership, commenting that it allows Chegg to simplify its business model and facilitate its transition to a 100% digital business. The company expects to be completely digital by 2017, and its digital businesses have already experienced great momentum.
The Ingram partnership allows Chegg to drastically increase its margins, which, coupled with higher user growth in the coming years, should increase the company's free cash flow.
Chegg also has immense growth potential. The company has proven that it can integrate new features at the right time and at a very low cost. Its efforts to become completely digital will also increase margins and lower cost, boosting the top and bottom lines.
The company anticipates launching a service called "Test Prep," which will be initially offered to high school students. It will be marketed as an online, adaptive and affordable learning service. If this feature gains traction, Chegg will offer it to college students as well.
The cost of education certainly plays into Chegg's hands. If the company can offer a high-quality, low-cost test preparation service, I think that it will be extremely popular. With SATs, ACTs, BAR exams and a laundry list of required tests, there is no shortage of scale.
As for the numbers, Chegg's margins increased by 6.7 points year-over-year to 47.1%. Revenue for the second quarter increased 37% year-over-year on a pro forma basis, and Q2 EBITDA doubled year-over-year.
Chegg ended the quarter with cash, cash-equivalents and investments of approximately $67.2 million and no debt. The second quarter is a seasonally low period for cash for the company. Chegg expects to finish the year with approximately $100 million in cash, cash-equivalents and investments.
The Santa Clara-based company may be ripe for a takeout - eventually. The brand's exposure and name, alongside its absence of debt, make it attractive to potential suitors. While I'm not suggesting that Chegg is a takeout target right now, it is possible that if the company is able to meet its growth expectations, it will be a target.
I believe a possible acquirer is Barnes & Noble Education. Acquiring Chegg would provide ancillary textbook sales, and the company could easily expand Chegg's services to the 724 campus bookstores it operates.
Another possible acquirer is Google (GOOG, GOOGL). The company has Google Scholar, which is the Google search engine that teachers prefer. It links students with scholarly articles and journals instead of linking to sites like Wikipedia. Google has over $6 billion in cash and cash equivalents, and Chegg is a company valued at less than $1 billion.
This wouldn't be an acquisition that moves the needle for Google, but it would undoubtedly have a place in its portfolio of products.
