This is my first article at SA so go easy on me please J
When I first read the most recent IPO filing of Chegg, there are a few things that caught my eye.
" In 2010, 2011 and 2012, we generated net revenues of $148.9 million, $172.0 million and $213.3 million, respectively. During the same periods, we had net losses of $26.0 million, $37.6 million and $49.0 million, respectively. In the nine months ended September 30, 2012 and 2013, we generated net revenues of $145.1 million and $178.5 million, respectively, and net losses of $57.2 million and $50.4 million, respectively. "
Point #1 The higher the revenue they generated, the higher their losses
"As a result of our investment philosophy, we do not expect to be profitable in the near term." To make things worse, they already incurred $42 million of losses from the first 9 months of 2013 alone!
Point #2 They are already warning investors that they will continue to incur losses in the near term.
And this is a company that is selling at almost 6 times book value, with expected future losses, and no end in sight. What is the real problem with this company? The problem lies in their business model. Some textbooks come out with a new edition every year, some every few years. And this is something they cannot control. Fortunately, they realized this and they are slowly moving into "Non-print products and services". However, the revenue generated from "Non-print products and services" is only 13% of their revenues in 2012 and 20% net revenue during the first nine months of 2013. If you take the textbook rental business away, what will the value of the company be? To make things worse, Amazon is now in the textbook rental business. Amazon can afford to lose money renting books to students for a while. But can Chegg keep doing what they are doing?
Akram Razor made an excellent point that they have an excellent CEO. But the problem lies in their business model.
""When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact." Buffett
They have a flawed, money losing business model. When I am comparing this company to other profitable companies like Cisco that is selling at 2 times book value with almost 50 billion in cash and consistent earnings and revenue growth. I ask myself, how much is Chegg worth? Is it worth the almost 6 times book value or is it worth maybe 20 cents on the book value for a money losing business? The naïve investors who buy this company will bear most of the losses.
The good news is that they have an initial lockup period where their initial investors cannot sell until 180 days have passed after the IPO which is :
What do you think will happen when the lockup expiration ends? You tell me!
On a different matter, we have a Bank of America analyst who rated this as a BUY.
Here is the article:
Bank of America analyst Nat Schindler initiated coverage on Chegg (NYSE: CHGG with a Buy rating and $11.50 price target.
In the report, Bank of America noted, "Chegg is a leading provider of learning media with over 180,000 print and 100,000 eTextbook titles available to rent or purchase and solution sets for over 3,000 of the most popular STEM textbooks. Its cloud-based Student Hub simplifies the complex process of attending college while serving to lower the cost of education. Its content library, early leadership in digital books, and the high capital requirements of book distribution serve as significant competitive moats, and we see few retailers that can effectively compete with Chegg. We are initiating with a Buy and an $11.50 PO."
Are you kidding me? Year after year of money losing business with a target of $11.50 that is selling at almost 6 times book value? A competitive moat in book distribution that is losing money and getting killed by Amazon? After I looked closely at the IPO filing, I realized Bank of America is one of the underwriters and I wonder why J.
Disclosure: I am short CHGG, .