A lot can be said for investing in well-known companies that have been proven winners over the long term. But if you only look at notable companies, you might miss out on up-and-coming under-the-radar businesses that could deliver exceptional returns as they grow.
Chewy (CHWY 1.92%) and Chegg (CHGG 1.03%) are two such companies that haven't received a lot of attention lately but should be on investors' radars. What follows is a case for why these two stocks should be added to portfolios for 2022.
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1. Chewy
Online pet products retailer Chewy is riding the back of two secular tailwinds: increasing e-commerce spending and the increased adoption of pets in the pandemic.
Chewy is gaining traction in the industry with 20.4 million active customers as of Oct. 31, up from the 17.8 million reported in October 2020. As customers mature with the company, many increase their spending year over year. And the company offers at least one compelling reason to join: Customers who sign up for its autoship program, which is similar to Amazon's Subscribe and Save, get free access to a Chewy-provided veterinarian over the phone or video chat.
That has helped revenue increase from $901 million in 2016 to $7.15 billion in 2020. What's more, Chewy is increasing operating efficiency, and its gross profit margin has expanded from 16.6% to 25.5% in that same time.
2. Chegg
The education technology company Chegg is helping millions of students get through their college curricula. The company experienced a surge in demand at the pandemic onset as students were sent home for remote learning. Finding themselves away from campus resources, students demanded help with courses, and Chegg stepped up.
The company is built on a profitable business model. Students pay a monthly subscription fee to access Chegg's resources (70 million pieces of proprietary content). And it offers students the option to ask 20 questions per month to subject-matter experts -- another piece of valuable content available to all students on the platform.
Interestingly over time, students will find less need to ask questions to subject-matter experts because the platform will be populated with sufficient content to help get through any difficulty that students may be grappling with. The college curriculum does not vary all that much year over year; new students progress through the same courses.
That has allowed Chegg to increase adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by a compound annual rate of 65% from 2016 to 2021.
An excellent opportunity for long-term investors
To make the case even more compelling, each of these stocks is down in price by more than 35% year to date in 2021. Supply chain disruptions are hitting Chewy and hurting sales and margins in the short term. Chegg's stock is getting hammered in the short term as colleges started holding classes in person again. The price crashes have each of these businesses trading at a price-to-sales ratio near the lows of the last three years.
For those reasons, Chewy and Chegg are excellent under-the-radar stocks that investors can add to their portfolios in 2022.
