Avoid Chegg Stock As ‘Learn From Home’ Fades Away

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As you may recall, shares in online textbook and tutoring company Chegg (NYSE:CHGG) cratered in price last month. After reporting underwhelming quarterly results and guidance on Nov. 1, CHGG stock dropped 48.8% the following trading day alone. It tanked from just under $60 per share, to around $32 per share.

Chegg (CHGG) logo on the company's web page magnified by a magnifying glass

Source: Casimiro PT / Shutterstock.com

In the weeks that followed, it continued to drift lower, falling to as low as $24.25 per share. Right now, the dust may be starting to settle, thanks to news of an acquisition, plus news of a large share buyback. However, this doesn’t mean it’s time to buy.

You may believe that this stock’s high double-digit decline in such a short span of time is a sign that the market overreacted. Yet it looks more likely that the crowd was on the mark when they bailed post-earnings.

With trends no longer on its side, and with the latest developments doing little to change the situation, further disappointment is more likely than any sort of recovery.

CHGG Stock at a Glance

Before diving into recent news with Chegg, I’ll give you a brief overview of the company, in case you have only a faint familiarity with it. Based in Santa Clara, CA, the company got its start as a textbook leasing service. In recent years, however, its Chegg Study platform has become its main business.

Providing subscription-based homework help, test prep, tutoring and related services, this unit saw tremendous growth in 2020. Due, of course, to the Covid-19 pandemic. When in-person learning was put on hold, and “learn from home” became widespread, demand skyrocketed for its services.

This ultimately turned CHGG stock into one of many stocks propelled higher by pandemic tailwinds. Between April 2020, and February 2021, shares went from around $35, to as much as $115.21 per share. Then, with the end of lockdowns, and a “return to normal” for education, demand started to slack.

Starting in the first fiscal quarter of 2021, revenue stopped growing on a sequential (quarter-over-quarter) basis. As seen in the latest earnings report (covering the quarter ending Sept. 30), results took a moderate dive from the previous quarter ($171.9 million versus $198.5 million). Needless to say, that wasn’t the worst bit of news to come out from the Nov. 1 earnings release.

Why Chegg Shares Aren’t Bouncing Back

Like I discussed above, it wasn’t the company’s revenue numbers for Q3 2021 that drove investors to drop CHGG stock. It was the company’s Q4 2021 outlook, and the prepared remarks that accompanied the earnings release, from CEO Dan Rosensweig.

Forecasting $194 million-$196 million in net revenues for Q4, guidance was well under analyst consensus. Sell-side numbers were calling for $241.7 million in sales in Q4. Worse yet, was Rosensweig’s statement about “significantly fewer enrollments than expected this semester” affecting performance in the near term.

But while Rosensweig may chalk this up as “temporary,” there’s a lot more you can read into this. With lockdowns over, and students on campus once again, there’s no longer as much need for third-party services. In hindsight, the high level of growth it experienced in 2020 was a one and done event. This may not necessarily mean revenues are about to fall off a cliff. Although, it could signal that, going forward, Chegg will only see low-to-moderate revenue/earnings growth.

That’s why the market reassessed its valuation. This is no longer a growth stock. Admittedly, investors are warming back up to it, in the hopes that both its recently announced deal to buy language education provider Busuu, plus its $300 million share repurchase plan, will get shares moving again in the right direction.

Regarding the Busuu deal, one analyst (Needham’s Ryan MacDonald) has argued that it’s unclear whether this deal will help Chegg’s international expansion efforts, or counter a slowdown in growth with its main business. As for the share buyback plans? This could help boost earnings-per-share (EPS). However, it’s not going to convince investors to give this stock a higher valuation.

Chegg will likely continue to trade at an earnings multiple (20.8x) in line with its growth prospects.

The Verdict on CHGG Stock

Put simply, Chegg is a busted growth story. Last year, you could make the argument that the digitalization of education meant many more years ahead for the company to expand at an above-average clip.

However, in hindsight, it’s clear booming demand for Chegg Study was a temporary event. Management may use the phrase “temporary” to describe what’s happening to its lower-than-expected enrollment numbers. But in the quarters ahead, we could see results continue to disappoint.

Coming in with an ‘F’ rating in Portfolio Grader, the market correctly re-priced CHGG stock after it fell off the growth train. With little signs it’s getting back on, your best move is to stay away.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.

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