What happened

Shares of Chegg (NYSE:CHGG) were up 20.4% in July, according to data provided by S&P Global Market Intelligence. The company didn't report any developments during the month. But with the coronavirus impacting the reopening of schools and colleges, companies like Chegg that specialize in e-learning were hot investments.

Chegg stock even hit all-time highs in July. It's since gone on to new highs in August, after the company reported results for the second quarter of 2020 and raised guidance.

CHGG Chart

CHGG data by YCharts

So what

In Q2, Chegg saw its net revenue increase 63% year over year to $153 million. Reflected in this revenue growth was healthy organic subscriber growth of 58%, and 67% subscriber growth when including its acquisition of Mathway. The end result was Chegg recorded $10.6 million in quarterly net income, up from a loss of $2 million last year.

This was the kind of growth Chegg investors were counting on. On the surface it appears their bet on the e-learning megatrend is paying off.

A chart showing an upward arrow and a row of increasingly larger dollar symbols being drawn on a chalkboard

Image source: Getty Images.

Now what

I'd argue Chegg is not a direct beneficiary of the shift to online education. Companies like 2U and K12 are enabling the trend by partnering with schools and universities to provide distance-learning solutions. This indeed has accelerated because the COVID-19 pandemic, and it could see enduring application in the long term. 

By contrast, Chegg offers more of a complementary educational service. Students have reason to use Chegg's study tools whether they're physically present in a classroom or not. Perhaps there's slightly more incentive to subscribe to Chegg if you don't have regular face-to-face access to a professor. But the company was growing at a fast pace prior to the coronavirus, and I'm not sure the pandemic meaningfully accelerates it.

Consider that Chegg's full-year revenue grew 21% in 2018 and 28% in 2019. For 2020, revenue is expected to grow 48% at the midpoint of guidance. Some of this could be attributed to the pandemic. But the company has also been identifying cases where students were sharing an account. Chegg's blocking of those accounts and then signing up the students separately also helps explain the company's accelerated growth.

It doesn't mean the mid-cap stock will necessarily be a bad investment. It simply means investors need to be careful not to set their expectations too high for Chegg. It may not get the COVID-19 bump they're expecting.