Chegg Higher On Services Growth

| About: Chegg, Inc. (CHGG)

Summary

Chegg reported that its services revenue increased by 33% year-over-year to $29.9 million.

Chegg tutoring business was strong with over 70% growth in tutoring minutes on a year-over-year basis.

Management is working to position Chegg as the leader in the outside the classroom education market.

Shares of Chegg (NYSE:CHGG) traded significantly higher on Tuesday morning, up 11.01% to $6.15 per share. The move higher was sparked by a positive earnings release after the bell on Monday. Chegg is an interesting company, and a leader in the education technology industry.

Chegg, if you aren't familiar, is an online direct-to-student education company. Chegg, with more than 40 million unique annual visitors, is a giant in the textbook and tutoring industry.

The bounce was a bit unexpected. Shares of the company had been down by about 35.5% over the last year. And since the start of the year shares had been down by about 20.26%.

The company reported earnings above analyst expectations. Chegg reported $0.05 EPS in the quarter, beating analyst expectations of $0.03 EPS. On the topline, the company reported $52 million, down 21% on a year over year basis. The bump higher was due in large part to reported strength in the company's high margin services business. Chegg reported that its services revenue increased by 33% year-over-year to $29.9 million. Included in its services business, Chegg Study, sustained a 78% renewal rate in the quarter. In addition, the company's tutoring business was strong with over 70% growth in tutoring minutes on a year-over-year basis.

Chegg stock is rebounding off multi-year lows, and I'm thinking about initiating a small long position in the company.

Over the last couple years, Chegg has struggled to monetize its enormous traffic base. However, management's focus on its services business might be exactly what the company needs.

The education system in the United States is changing. Budget cuts, higher costs, fewer teachers and new technology is changing the way that students learn inside and outside the classroom. The next generation of middle school, high school and college students will embrace technology more than any generation in history. Learning is moving from inside the classroom to outside the classroom. This year the United States will spend more than a $1 trillion on the education sector, or roughly 5% of the total GDP.

As education shifts outside the classroom, Chegg's services business stands to benefit. Chegg services offers online homework help, on-demand tutoring, online writing help, and online test preparation. Chegg has invested in its services business through acquisition and technology investment. And I believe management is working to position Chegg as the leader in the outside the classroom education market.

Rather than initial a position by buying shares of Chegg, I'm looking toward starting my long position by selling puts. Specifically, I'm looking at the January 20, 2017 put at the strike $5. According to Nasdaq, you should be able to collect about $0.30-$0.35 per contract by selling the $5 puts at the current bid. You could realize a 6% return from now up until January, or 12% on an annualized basis.

Chegg shares would need to drop by 23% from now until January for you to experience a loss. And, considering the fact that shares of Chegg are already down substantially this year, I find it hard to believe that there is much more room to the downside. Chegg has built a strong brand and portfolio of online assets. On the back of a strong earnings quarter, I believe shares of Chegg have changed direction in 2016.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CHGG over the next 72 hours.

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.