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Why Chegg Stock Crashed Today

By Joe Tenebruso - Nov 2, 2021 at 7:00PM

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People just aren't going to school like they used to.

What happened

Shares of Chegg ( CHGG 8.37% ) plunged 49% on Tuesday after the online learning platform warned investors that a tight labor market and COVID-19-related challenges were denting demand for education services. 

So what 

Chegg's revenue rose 12% year over year to $171.9 million, driven by a 23% rise in services revenue, to $146.8 million. The education technology company's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), in turn, jumped 45% to $46.4 million.

"Over the last year and a half, we experienced extraordinary growth and, in midst of a strong year, had a solid third quarter," CEO Dan Rosensweig said in a press release.

A downwardly sloping stock chart.

Chegg shed nearly half its value on Tuesday. Image source: Getty Images.

However, investors' excitement turned to concern after Rosensweig spoke of industrywide challenges that are likely to pressure Chegg's profits in the coming quarters.

"A combination of [COVID-19] variants, increased employment opportunities and compensation, along with fatigue, have all led to significantly fewer enrollments than expected this semester," Rosensweig said. "And those students who have enrolled are taking fewer and less rigorous classes and are receiving less graded assignments." 

Now what 

Chegg said the decline in student enrollments would take a toll on its fourth-quarter results. Management now expects the company to generate sales of $194 million to $196 million, which was well below Wall Street's estimates of nearly $241 million. 

The shortfall led multiple research firms to downgrade Chegg's stock. For one, Piper Sandler analyst Arvind Ramnani slashed his share price forecast from $107 to $54 following Chegg's "disappointing" results. For another, Morgan Stanley analyst Josh Baer cut his target price from $88 to $53 due to the company's "concerning commentary" and lower expected revenue in 2022.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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