When the coronavirus first escalated into a pandemic in the U.S., universities moved classes online. That left a significant void for students. They would no longer be receiving in-person instruction from professors, and students benefit in many ways from on-campus learning such as detailed explanations of course material and robust debate with their peers, to name a few.
Chegg (CHGG 9.38%), the leading online student learning platform, is helping to fill that void. But the demand for assistance with completing courses and learning new material is still outstripping what is actually available for students, which is one reason why Chegg is poised for continued growth.
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Classes moving online is increasing demand for its services
In its most recent quarter, Chegg saw its revenue increase 63% year over year to $153 million. CEO Dan Rosensweig noted in the earnings release, "Chegg was built with a belief that learning would move increasingly online, and we have always bet on that inevitability. The COVID-19 pandemic has accelerated that shift."
Coursework moving online creates demand from students for two reasons. First, if assignments can be completed and submitted online, the value proposition for the services offered by Chegg thereby increases. Second, when courses move online, the quality and availability of interactions with teachers is reduced -- leaving Chegg with an opportunity to step in and provide students with the learning resources they need.
For the fall semester that just started, many universities have moved the majority of their classes online once again. This is in comparison to the spring semester when classes went virtual in only the final weeks of the term. The California state university system, the largest in the U.S., will move all of its schools online for the fall semester (with a few exceptions).
Chegg will continue to reap the benefits of the increase in demand as it did in the most recent quarter when subscribers grew 58% year over year. The continuation of the surge in demand is leading management to significantly raise revenue expectations for the third quarter and the rest of the year. Chegg now expects third-quarter revenue of $142.5 million at the midpoint and $610 million for full-year 2020. That guidance represents year-over-year growth of 51% and 48%, respectively.
And if its most recent quarter was an indication of the increasing profits to come as a result of the expanding top line, investors in this consumer stock have something to be excited about. Operating income more than tripled year over year to $22.1 million.
Beyond the coronavirus pandemic
In the long run, Chegg has the opportunity to increase user engagement by offering more services to students. For the 2018 to 2019 academic year, average college graduation rates across the U.S. were 55%. Many factors play into graduation rates, but the availability of learning resources is one of the most significant.
Chegg currently offers users the ability to look up sample solutions to concepts, ask a limited number of questions to subject matter experts, and connect with tutors for an additional fee. There is potential to expand on those services. The recent $100 million acquisition of Mathway, an online, on-demand math problem-solving company will undoubtedly help.
Moreover, Chegg is increasing its investments in "international growth and development, the Chegg Study Pack, device management technologies, and our skills-based learning service." Combined with infrastructure that will allow the company to scale rapidly, management expects to ramp up this spending while still delivering bottom-line growth.
What this means for investors
There is a large gap between what students need to succeed in higher education and the services available to them. Chegg is the leading online student learning provider and is in a position to serve that market. Indeed, management expects the growth to continue.
In the August earnings call, CFO Andy Brown said, "The momentum we are seeing in the business accentuated by the pandemic is likely to continue for the foreseeable future, and we expect to be a high growth, high-margin company for years to come."
