The new year is upon us, and with it new opportunities. One opportunity I like to take advantage of is investing in the stock market. Over the long term, it has proven to be an excellent way to increase your wealth. Typically, I like to hold a group of stocks; that way, if one of them does poorly, it will not sink my chances completely.
However, if I had to choose only one stock to invest in for 2022, it would be the education technology company Chegg (CHGG -0.97%). Due to short-term factors, the stock got hammered in 2021 -- but Chegg has a long-term competitive advantage that will be difficult to overcome. Here's why Chegg is my top pick for 2022.
Proprietary content is driving subscriber growth at Chegg
Chegg primarily serves college students. The company offers step-by-step solutions to concepts students may be having difficulty resolving. Additionally, students that subscribe to Chegg's services get the chance to ask 20 questions per month that get answered by subject-matter experts. In that way, if Chegg does not already have the content you are looking for, you can ask the question to a Chegg-provided expert who will usually post an explanation within hours.
That answer becomes available for all other Chegg subscribers to view. Indeed, Chegg has 70 million pieces of this kind of content. The material serves to attract new subscribers through low-cost channels like search engines. What's more, Chegg pays for the material one time upon its creation, but students could find the material helpful for several years.
As of its most recent quarter ended Sept. 30, Chegg boasted 4.4 million subscribers, up from 3.7 million in the same time last year and 2.2 million in the year before that. Demand for Chegg's services surged at the pandemic onset when millions of students were forced into remote learning. Students can benefit from Chegg whether they are taking online classes or studying in person, but being away from university resources increases interest.
And like subscriber growth, revenue doubled from $321 million in 2018 to $644 million in 2020. Chegg is on pace for revenue of $763 million in 2021.
Impressively, the revenue growth boosts operating profits at Chegg, which increased from negative $6 million in 2018 to $57 million in 2020.
Chegg has an excellent business model and is selling at a great price
That's all great, but what makes Chegg my top stock pick for 2022 is the price. Chegg's stock is down 66% year-to-date, crashing after the company announced third-quarter earnings on Nov. 1, when management highlighted significant headwinds from declining college enrollment in the U.S.
Indeed, college enrollment in the fall semester was down by 7.8% from the same semester in 2019. That's understandable; completing a college course is difficult under normal conditions, and that much harder during a pandemic. That being said, this is a temporary issue. Student enrollment is likely to rebound as the world recovers from COVID-19.
Meanwhile, investors can buy Chegg's stock at a price-to-free-cash-flow ratio of 26.7, the lowest in its last five years, and a price-to-sales ratio of 5.7, the lowest since 2018.