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1 Growth Stock That Smart Investors Should Know About

By Parkev Tatevosian, CFA – Oct 1, 2021 at 5:57AM

Key Points

  • Chegg is an education technology business with a competitive advantage.
  • The stock is not expensive, trading at a price to free cash flow ratio below its five-year average.
  • Chegg has penetrated less than 10% of its estimated addressable market.

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This little-known growth stock is making headway in building its business with a strong moat.

If you are an intelligent investor, you are probably always looking for stocks that could potentially make good buys. The company I am going to tell you about fits that mold. 

Chegg (CHGG -3.17%) is an online student learning platform. The company helps students get through college with a little less struggle and a little more confidence. Chegg has built a defensible moat, and the business is run efficiently. Here's what makes it an interesting stock. 

A student wearing headphones sitting at a desk writing.

Chegg is trading at a price to free cash flow of 65. Image source: Getty Images.

Education technology business 

At its core, Chegg is an education technology business. It collects revenue from students who are in college by offering them help with their studies. In that way, it's probably unlike many other stocks in your portfolio. And Chegg can potentially perform well even through a recession. 

The more students at university, the more potential customers there are for Chegg to acquire. During a recession, when jobs are scarce, college enrollment tends to increase. So while a prolonged recession could be a significant risk for other stocks in your portfolio, it would be less of a hazard for Chegg.

Profitable growth 

CHGG Revenue (Annual) Chart

CHGG Revenue (Annual) data by YCharts

Efficiencies embedded in Chegg's business model allow it to grow revenue profitably (see chart). Students come to Chegg for its content. The material is custom-made at the request of students. Chegg subscribers, as part of their subscription, get the privilege to ask 20 questions per month. The company then has those questions answered by experts, and that question and answer become available for all subscribers to see.

Chegg has accumulated 66 million pieces of this type of content, and that portfolio is becoming a defensible moat that keeps competitors from encroaching on its business. This is not something a deep-pocketed competitor can instantly buy unless Chegg is the one selling it. 

In other words, Chegg primarily spends on content its members are asking for. If Chegg already has the explanation a student is looking for, then Chegg does not need to pay for that content again -- it's paid for once and then serves multiple students for multiple years. As you can imagine, the academic curriculum for finance, economics, physics, calculus, and so on stays roughly the same, with minor changes from year to year. 

The company has grown to boast 6.6 million service subscribers as of its most recent quarter ended June 30, but it has a long runway for growth. Management estimates there are 102 million students worldwide that can benefit from Chegg's services. 

Inexpensive price to free cash flow 

Chegg is trading at a price to free cash flow of 65, which is roughly the same as it was selling for late in 2019 before the pandemic's onset and lower than its average over the last five years. That's despite the company's progress in building its defensible moat with the millions of pieces of user-requested content it has added to its assets.

For those reasons, Chegg is a little-known stock that savvy investors should put on their radars

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
$27.19 (-3.17%) $0.89

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