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Study Hard, Use Chegg

|About: Chegg, Inc. (CHGG)

Scalable Growth Model.

Growing user base.

User base expanding through coding boot camps.

Chegg is the leading direct-to-student learning platform for students of all ages, demographics, and locations. Further, Chegg supports students into their career with tools designed to help them pass their tests and classes and save money while doing so. The company’s services are available online, making them available anytime and anywhere. The subscription-based platform offers a recurring stream of revenue for the company. The primary Chegg Services include multiple functional divisions of Chegg, including Chegg Study, Chegg Writing, Chegg Tutors, and Chegg Math Solver, all covering a broad range of academic disciplines. In addition, “Expert Answers” and step-by-step “Textbook Solutions,” are provided, which help students check assignments and better comprehend information. Chegg also owns four writing services, which are EasyBib, Citation Machine, BibMe, and CiteThisForMe. These resources can be used to create citations, check papers for grammar errors, and detect possible plagiarism. Further, Chegg partners with print textbook partners to offer print textbooks and eTextbooks in a library for rent and sale, which in turn helps students save money compared to the cost of buying new at their university bookstore.

Chegg is sustained growth play with a scalable model. Their projected gross margins for Q3 are between 74%-75%. Through operational efficiency, Chegg will be able to turn profitable and deliver long-term value to shareholders by reducing educational material costs for students. The current share price reflects negative sentiment from earnings and offer value investors a chance to get a high-growth company at a low multiple. In the 6 months ended June 30th in 2018 and 2019, the company lost $6,529,000 and $6,347,000 respectively, while top line improved with double digit growth. This shows Chegg’s ability to contain costs while still growing their service based revenue.

On the income statement, Chegg has reported double digit growth. For Q2 2019, Chegg reported net revenues of $93.9 million, an increase of 26% from a year prior. Additionally, their services revenues grew 30% year-over-year, to $80.3 million, and represented a total of 86% of net revenues. The ratio of service revenues/total net revenues increased 3%, a good sign for the health of the business and sustainability of Chegg’s revenues through the subscription-based platform. Furthermore, Chegg’s service subscribers increased 25% year-over-year, to a total of 2.2 million subscribers, while total Chegg Study content views totaled almost 200 million, a 25% increase from a year prior. While this growth may not be sustainable, the traction Chegg is gaining with students of all backgrounds in undeniable.

On the balance sheet, current assets are up 4.5X since 2014. The company has no short-term debt, and in April 2018 raised $345 million in convertible debt, using around $20 million of the proceeds to repurchase shares. For a company that has raised guidance for 3 consecutive years, this is a fantastic vote of confidence in the underlying business model. The remaining proceeds from the offering were used to acquire Thinkful, an online learning platform that offers professional courses directly to students across America, and other expenditures of working capital and corporate purposes.

Thinkful is a coding bootcamp that targets students who want to self-teach different programming languages. After vetting over 40 bootcamps, Thinkful’s DTC strategy and independence from university partnerships is what inclined both boards to approve the acquisition. Their mission statement of furthering education and empowerment through digital learning aligns with Chegg’s and the synergies from the acquisition could be recognized as soon as Q1 2020. Thinkful will add approximately $2 million to Chegg’s fourth-quarter revenue, according to EdSurge. Thinkful’s 2018 net revenue was about $14 million, up 30 percent from the previous year.

In addition to their established partnerships, Chegg partners with a variety of third parties. Chegg sources print textbooks, eTextbooks, and supplemental materials directly or indirectly from publishers in the United States, including Cengage Learning, Pearson, McGraw Hill, Sage Publications, and MacMillan, which are some of the most recognized brands in learning materials. In 2018, students rented or bought over 5.4 million textbooks and eTextbooks from Chegg.

The above infographic breaks down the demographics Chegg reaches. In addition to this, Chegg’s connected learning platform reaches approximately 11 million unique user per month.

Chegg is a deep value play that is revolutionizing the way young adults around the world educate and train themselves to tackle challenges both inside and outside the classroom. The tools offered by Chegg uniquely prepare students for academic coursework. Their rapid growth, sustainable business model, and strong financial position pose them for strong growth in 2020 and beyond.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.