Chegg (NYSE:CHGG), the direct-to-student online learning platform, reported its third-quarter financial results after the market close on Oct. 26. Shares dropped by over 10% after the release, in part because investors did not like what they heard about next year's guidance. The drop could also be explained by the fact that the stock was already up over 100% year to date.
Regardless of the price action, the company revealed some important developments when it released its report. Here are three significant factors to take note of.
Robust revenue, increasing margins, but disappointing guidance
The first takeaway from Chegg's Q3 earnings report should be the robust revenue growth of 64%. A couple of factors played into this. The company's investments to reduce account sharing started paying off. And the coronavirus pandemic is causing many colleges to shift classes online, which is increasing the need for the Chegg platform.
Second was the 69% growth in new subscribers. The company now lists 3.7 million service subscribers. Importantly, each incremental subscriber adds roughly 90% to the bottom line. Therefore, subscriber revenue is the highest-value business the company can acquire. Shareholders should be pleased with 69% growth in such a high-margin segment.
Third, the company updated its forecasts for the fourth quarter and the full year and provided an early estimate of its expectations for fiscal 2021. For Q4, the company is forecasting revenue of $189 million and adjusted earnings before interest taxes and depreciation (EBITDA) of $83 million, both figures at the midpoint. That raised the outlook for the full year 2020, and the company now expects total revenue of $627 million and adjusted EBITDA of $202 million, again both at the midpoint.
Investors may have been disappointed in the company's early forecast for the full year 2021 for total revenue of $775 million and adjusted EBITDA of $260 million. That's because at those targets, the growth rate would be a decrease from more than 50% in 2020 down to the roughly 25% forecast for 2021. That could have been one reason the stock price sank almost 10% following the report.
Still, investors need to keep in mind that this estimated 25% increase would be on top of a significant jump in 2020. Before the big gain in revenue helped by the coronavirus pandemic, the company grew sales by 26% in 2018 and 28% in 2019.
What it could mean for investors
The direct-to-student learning platform has a long runway. Even after the pandemic, there is likely to be an increasing portion of courses delivered online. Add to that two growth drivers from increasing international usage and investments in technology to reduce account sharing.
And the company sees a large portion of each additional subscriber's revenue reach the bottom line. Investors interested in a high-growth company with good long-run prospects should consider placing this consumer discretionary stock on their watch list.