Buy Chegg Stock at a Discount Before Q1 Earnings?

Digital education platform Chegg CHGG benefitted from the coronavirus-forced remote schooling environment, posting its best growth as a public firm in 2020. But the stock has taken a hit and is trading roughly 20% below its highs heading into its first quarter financial release on Monday, May 3.

Does Digital Learning Have Legs?

Chegg started largely as a discount textbook company for the digital age and grew despite Amazon’s AMZN dominance of the broader e-commerce book space. Today, Chegg is far more focused on providing digital-based tools to help college and other students succeed via online tutors, test prep, writing help, job and internship search platforms, and much more.

The pandemic shined an even brighter light on the need for digital learning offerings, with CHGG’s FY20 revenue up 57% to help it blow by the previous two years of roughly 27% sales expansion.

Chegg closed last year with a record 6.6 million subscribers, up 67% from 2019. Students of all ages hope they will be able to return to their normal routines soon, especially as the vaccine is rolled out.

Yet, no matter what happens in the near-term, studying and learning outside of structured environments is taking place digitally, as students and parents look for extra help and practice on platforms like YouTube GOOGL and beyond.

Chegg’s tagline is “A Smarter Way to Student” and it could potentially benefit from a shift in education, as the cost of college skyrockets. “The transition to online and hybrid learning is inevitable and, with the accelerated trends that we are seeing, we have the confidence to raise our guidance for 2021,” CEO Dan Rosensweig said in prepared fourth quarter remarks.

What Else

Chegg was the beneficiary of the remote-based play that helped many tech names early on in the pandemic. And the stock has climbed 115% in the past year. This recent strength is part of a much bigger run over the past five years that’s seen CHGG soar a whopping 1,900% from under $5 a share in 2016 (over $40 even before the pandemic) to Thursday’s closing price of $92.28 a share.

The stock is currently trading about 18% below its mid-February records, after getting caught up in the wave of growth selling during the Nasdaq’s correction. CHGG has regained some of its footing and it recently broke above its 50-day moving average. And Chegg hovers nearly right at neutral RSI levels at 51, which means it could climb if Wall Street takes a liking to its first quarter release or outlook.

The stock has also topped our bottom-line estimates by an average of 22% in the trailing four quarters. With this in mind, Zacks estimates call for its adjusted Q1 EPS to climb 41% to $0.31 a share on 40% higher revenue.

Chegg’s overall fiscal 2021 earnings are projected to climb 27% on 23% stronger sales to reach $789.3 million. The company is then projected to post similar top and bottom-line expansion in 2022. These projections mark a slowdown compared to the last several years, but they compare favorably to its growth prior to FY18.

Bottom Line

Chegg lands a Zacks Rank #3 (Hold) at the moment and a “B” grade for Growth in our Style Scores system. CHGG is also a pure growth play, trading at 88X forward 12-month earnings and 16X forward sales, both of which represent huge premiums to its broader industry.

Clearly, many on Wall Street are betting on the long-term viability of this digital education company. And 13 of the 16 brokerage recommendations Zacks has for Chegg are “Strong Buys” or “Buys,” with only one “Sell” rating. Therefore, some investors might want to take a swing at this growth stock on the dip, while others will consider seeing how the market reacts to its upcoming earnings results.

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