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Why This Beaten-Down Growth Stock Is Poised for a Bull Run

By Parkev Tatevosian, CFA – Aug 21, 2021 at 10:45AM

Key Points

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The stock is getting hammered because of reopening fears.

Chegg (CHGG -2.13%) started in 2005 as a company that provides high school and college students help with their curriculum at various levels and a variety of subjects. The company offers a subscription starting at $15 per month to access its resources.

Since the start of the pandemic, Chegg has experienced a surge in new users and activity on its site as millions of students were sent home to learn remotely. That got investors excited and sent its shares soaring in 2020. This year has been another story. Economies worldwide started reopening, bringing students back to campus and causing enthusiasm for the stock to wane.

Still, some of the effects that boosted its business during the pandemic will not reverse in its aftermath. 

A student works on a computer.

Image source: Getty Images.

Content is king

The primary reason students subscribe to Chegg is for the content. Imagine you are a student reading the course textbook and you come across an example that's a bit confusing. You look through the pages for a similar problem with different numbers that might help you understand the process better, but you don't find one. Now you're stuck. You might need to figure this out to complete an assignment or take an online quiz or exam. 

Here is where Chegg comes into play. The company has over 66 million pieces of content, including step-by-step solutions to problems. What's more, if Chegg doesn't have the content you are looking for, you can ask 20 questions per month to subject-matter experts who will usually post a step-by-step solution within hours. That new piece of content will be added to the site for all subscribers to access, and the flywheel turns.

Its main competitor, Course Hero, offers similar online help to students albeit in a different manner. Course Hero incentivizes students to upload study content to its site that others can view. Students get to view five pieces of content for every 10 pieces of content they upload. The result is that the resources tend to be lower in quality and less helpful than Chegg's. 

Before the pandemic onset, Chegg had 35 million pieces of content. It has added 31 million since then. Since these materials rarely become obsolete, the gains will provide long-lasting benefits. That could partly be why between 2016 and 2020 their EBITDA grew at a compound annual rate of 78% to $207 million and overall revenue reached $644 million. The company estimates EBITDA of $298 million and $810 million in revenue for fiscal 2021 ended December 31.

More online classes

The shift to remote learning boosted enthusiasm for the stock because Chegg is used more in online classes. If you are working on an assignment online, you can look on Chegg for similar problems and apply the step-by-step process to your assignment. The stock is down nearly 11% this year partly because schools are bringing students back on campus. The fear is that this change will cause a significant drop in usage on Chegg.

While that may be partly true, it's not entirely bad news. It was unrealistic to think schools would continue teaching remotely forever. Eventually, students were going to return to campus. Here's the good news: Colleges have been offering online classes for over a decade now. They are popular among students, especially those who have part-time or full-time jobs. The long-run trend has been to increase the selection of classes online. The pandemic put that into overdrive.  

Investor takeaway 

Since the pandemic's start, Chegg has added 31 million pieces of content, and from now on, more classes will be offered online. The business is better than it was before the pandemic started. While students returning to campus may slow the pace of growth, the long-run trend is in its favor. Investors looking for a growth stock poised for a bull run can add Chegg to their lists. 

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

Stocks Mentioned

Chegg Stock Quote
Chegg
CHGG
$27.59 (-2.13%) $0.60

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

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