Chegg: Opportunity Stems From Misunderstanding

Feb. 28, 2016 4:38 PM ETChegg, Inc. (CHGG)IM15 Comments
Michael Battat profile picture
Michael Battat
590 Followers

Summary

  • The Chegg story is incredibly misunderstood, making waters very murky.
  • But investing when the water is murky will ultimately yield clarity.
  • Use this opportunity to profit.

Until last week, you had probably only heard of Chegg (NYSE:CHGG) if you are the parent of a high school or college student. However, since Monday, February 22, Chegg has been on the radar of many investors. On that day, what will be known as "Black Monday" in the conference room at Chegg's headquarters henceforth, the company's stock plummeted 35%.

The question that now faces investors is whether the company's earnings report warranted a 35% decline in share value. Could the company really be 35% less valuable than the day before?

Earnings

Chegg's Q4 earnings report was mixed. Although the company reported earnings of $0.02 compared to estimates of a $0.12 loss, revenue fell 19% year over year to $68.2 million. 2015 is the first year in Chegg's history in which the company reported positive EBITDA for a full year, but investors clearly did not care about this feat.

To a company like Chegg - one that is currently in the midst of a business model transition - revenue is far more important than profit. So it doesn't help that the company lowered its Q1 revenue guidance to between $60 and $65 million.

Misunderstandings

Chegg is undergoing a large transition from a textbook rental company to one whose focus is on student services. The disconnect between the company, analysts, and investors is the chief reason why Chegg has fallen dramatically from its IPO price of $12.50.

This disconnect has created murky waters. Chegg CEO Dan Rosensweig understands this, though, and stated in a recent interview on Mad Money that he will focus on making it easier for analysts to understand the transition. After all, stocks trade relative to expectations. If the expectations reflect a revenue figure that is unachievable by the company, then the stock will get crushed. Once analysts begin to make more accurate

This article was written by

Michael Battat profile picture
590 Followers
I am a recent graduate of Emory University's Goizueta Business School (BBA '20). I love learning and try to be smarter each day in every aspect of life!

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.

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