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

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

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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 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.

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