What happened

Shares of Chegg (CHGG 1.10%), a provider of online education services, went up 42.9% in May, according to data provided by S&P Global Market Intelligence.

Investors cheered first-quarter 2020 results, reported May 4, that exceeded the company's expectations, bidding the stock price up.

Revenue was $131.6 million, up 35% from a year earlier, beating projected revenue of $122 million to $125 million. Non-GAAP profit was $0.22 a share, beating the Street consensus at $0.15. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), was $31.8 million, ahead of the guidance range of $27.5 million to $28.5 million.

So what

Chegg's financial results illustrate how the company's online education services are benefiting from the forced shift to working and learning from home due to the COVID-19 health crisis.

A young student celebrates in front of a laptop.

Image source: Getty Images.

As on-site educational costs have increased dramatically over the past decade, Chegg increased product offerings. In addition to online textbooks and classes, Chegg offers tutoring, video walk-throughs of problems, software that checks for writing errors and plagiarism, and a new study pack with tools for understanding virtually any subject material. Chegg also rounds out its offerings with a database of internships and jobs.

"In these difficult times Chegg performed ahead of our expectations and we are grateful to have helped so many students," said Chegg CEO Dan Rosensweig. "Our belief is that, in every industry, a crisis often accelerates the inevitable and that is what we see happening in higher education."

Now what

Tools that migrate educational and business functions online have been available for a long time, but adoption has been slow. The coronavirus crisis changed all that. Chegg couldn't have foreseen the health crisis, but the company was ready when it happened.

I don't see a reversion to pre-COVID-19 business as usual in Chegg's market, and neither does Chegg. I agree with Rosensweig's comment that change was inevitable, and COVID-19 drastically moved up the timeline. Financial guidance supports that view.

For the second quarter, Chegg forecasts revenue of $135 million to $137 million, with gross margin increasing to a range of 74% to 75%, from 67.8% in the first quarter. The company anticipates adjusted EBITDA increasing to between $48 million and $50 million. 

Chegg is up 48% year to date, which has been a massive run in a short period of time. While I'm a fan of Chegg as a star in the distance learning space, I think the stock has gone up too far, too fast. Shares are trading at about 50 times next year's earnings estimates, and I can't recommend buying it here.