Chegg (CHGG 1.00%) is a leading provider of online help for students in college or high school. The company has been growing for the last decade, and the pandemic supercharged that growth.
Millions of students were sent home for remote learning at the pandemic's onset, which kept them away from valuable on-campus resources like the library, computer labs, and in-person tutoring. It's no surprise then that so many students turned to Chegg for assistance in getting through the curriculum.
Fortunately for shareholders, the benefit of this surge in usage will last beyond a short-term boost to revenue and profit.
Millions of students will be returning to campus this fall. Image source: Getty Images.
A treasure trove of assets
Students pay Chegg a monthly fee starting at $14.95 to gain access to its services. Part of which includes the option to ask 20 questions per month related to the topics they are studying that get answered by subject-matter experts, usually within hours. Those questions and answers then become available for all Chegg subscribers to view.
CEO Dan Rosensweig discussed this material in the company's second-quarter earnings release: "To give you a sense of our size, we now have over 66 million step-by-step solutions in Chegg Study to help students master their subjects and, in the second quarter alone, we added 7 million new solutions that were asked and answered by our subject matter experts. And more than 37% of them were asked by international subscribers."
In February of 2020, before the outbreak, Chegg Study had 35 million pieces of content. In a year and a half, Chegg nearly doubled the content on its platform. This material is one of the main reasons students come to Chegg; therefore, the value to future Chegg subscribers is higher than ever. Keep in mind Chegg has not raised prices for its subscription in any meaningful way throughout the pandemic.
Compare that to a subscription service like Netflix. Imagine consumers getting nearly twice the content at the same price. That would probably give Netflix the pricing power to raise fees without losing very many customers. Or it could leave fees the same and allow the value to attract new customers. And while content created by Netflix gets consumed relatively quickly by regular users, Chegg's content remains highly relevant for the long term.
Step-by-step examples of calculus problems do not lose relevance. The curriculum stays the same over decades as new students take the course each semester.
What this could mean for investors
The content also acts as a low-cost or no-cost user acquisition tool. Students type in a query into a search engine, and if Chegg has relevant content, it pops up in the results. A few clicks later, the student gets the help they need, and Chegg gets a new subscriber. CFO Andy Brown commented on profitable expansion in prepared remarks following the Q2 earnings release, saying, "Our business model inherently supports operating leverage as we scale -- the majority of our subscribers are acquired through unpaid channels, our content is created once and then used many times by learners across the globe, and much of our learning content we offer is relevant globally."
Indeed, from 2016 to 2020, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) has grown by a compounded annual rate of 78%. The company has an excellent business model that got a shot in the arm during the pandemic. It will be difficult and expensive for any competitor to encroach on its territory now.
