Why Chegg Plunged More Than 20% This Week

What happened

Shares of online education company chegg (CHGG -4.41%) plunged as much as 25% this week, before settling into a 23% loss as of this writing on Friday. The education technology company reported earnings on Monday, May 5, delivering a miss on revenue but a beat on earnings per share. However, it was likely the forward commentary from management that caused such a precipitous decline.

So what

In the first quarter, Chegg’s revenue increased just 1.9% year over year, missing expectations, while adjusted (non-GAAP) earnings per share of $0.32 actually beat expectations.

More concerning than the quarter, however, what management’s outlook, which was lowered significantly relative to the guidance delivered on the prior fourth-quarter call. For the full year, Chegg now expects revenue between $740 million and $770 million, down from the prior outlook given back in February of $830 million to $850 million.

Needless to say, that’s a big cut to the full-year guidance. CEO Dan Rosensweig noted in prepared remarks that amid higher wages and high inflation, fewer students were enrolling in classes, opting rather to work to keep up with rising expenses, or taking fewer classes with less strenuous workloads. The results obviously surprised management, which had executed an accelerated share repurchase program when its shares were around $30 per share. Now, shares trade near $19.

Clearly, investors have lost faith in Chegg’s management to anticipate its business trends and allocate capital wisely. Hence, the big decline this week after that guidance shocker.

Image source: Getty Images.

Now what

Things seem pretty bad for Chegg right now, but on the bright side, the stock does look cheap. Shares currently go for about three times this year’s revised revenue guidance. While Chegg’s profits aren’t very big yet, they are positive, even on a GAAP basis, and the company has a lot of cash on the balance sheet. Therefore, it’s likely Chegg has the financial strength to invest in its business through this tough period.

Nevertheless, with high employment opportunities and students emerging from the stay-at-home posture of the last couple years, Chegg’s growth outlook is uncertain, to say the least. For those who have conviction in management’s plans for international expansion, as well as the growth of online learning, shares may be worth a look in this brutal bear market for technology stocks. That being said, there are a lot of high-quality tech stocks that are currently on sale.

Leave a Comment