Please ensure Javascript is enabled for purposes of website accessibility

1 Game-Changing Number You Missed From Chegg's Earnings

By Parkev Tatevosian - May 24, 2021 at 9:26AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This under-the-radar growth stock delivered a potential game changer in its Q1 earnings report.

Chegg (CHGG -5.38%) the digitally based textbook rental company is also an online tutor of sorts used by millions of high school and college students worldwide. The company is experiencing a surge of interest and usage since the pandemic when the whole world went to remote learning. Understandably so. When campuses closed, students lost many of the resources they had access to on campus, like visiting professors in person during their office hours.

While many professors maintained office hours virtually, the quality of help delivered is not as good as in person. It's no surprise then that students are seeking supplemental sources of help for their curriculum coursework. Chegg reported first-quarter results in early May, and there's a transformative number related to this increased need that you probably missed.

A woman studying at her desk.

Image source: Getty Images.

A treasure trove of assets

Even as schools in some parts of the world are beginning to bring students back for in-person learning, customer interest in Chegg remains high, partly because millions of students are still learning remotely and partly because of this one thing you likely missed from the earnings report -- content. 

In a presentation that accompanied its first-quarter earnings release, Chegg management said the company had 59 million pieces of supplementary content. This can mean a solution to a practice problem from a textbook -- of which it has 6 million. Or, more valuable, it can be questions asked by subscribers on its platform. As part of a subscription to Chegg, students get to ask 20 questions to subject matter experts on Chegg.com. Those questions and the step-by-step solutions are then placed on the platform, and all subscribers get access to them. That type of content makes up the rest (53 million).

Given that students have been using Chegg a lot this past year, Chegg has accumulated new and updated content from these students asking questions and getting them solved. In all, Chegg has added 22 million questions and answers since the first quarter of last year (May 2020). That's an increase of 60%. And that's the most relevant type of content. That's the help for concepts that students around the world are grappling with today. 

What this could mean for investors 

This content acts as a customer acquisition tool. Chegg paid for it once but generates value from it for years. New students enter mostly the same courses year after year. For example, Introductory Economics stays mostly the same, but every semester an entirely new group (hopefully) of students will register for the course.

Additionally, as it builds out its content library, the service becomes more valuable to the new group of students going through university. That dynamic has the potential to expand profits exponentially. Indeed, you can see its operating profit margin expanding nicely over time (see chart). The choppiness is due to the seasonality of the education business. 

A chart showing Chegg's operating profit margin over time.

Data source: YCharts

The stock is being swept up in the recent general selling off of growth stocks and is trading down about 20% in the last month. It's now trading at a now more reasonable forward price to sales ratio of 13. Investors looking for a growth stock with excellent long-term prospects might want to consider adding Chegg to their portfolios. 

Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool recommends Chegg. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Chegg Stock Quote
Chegg
CHGG
$20.77 (-5.38%) $-1.18

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
402%
 
S&P 500 Returns
129%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/17/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.