Better Education Stock: Nerdy vs. Chegg

Nerdy (NRDY) and Chegg (CHGG 1.88%), which both provide online education services, were both crushed over the past year as investors rotated away from the sector in a post-lockdown market.

Nerdy went public by merging with a special purpose acquisition company (SPAC) last September. Its stock closed at $11.56 on the first day, but it's now trading at about $4 per share. Chegg, which went public via an IPO back in 2013, lost nearly 70% of its value over the past 12 months. Let's see if either battered education stock can possibly bounce back in 2022.

Image source: Getty Images.

What do Nerdy and Chegg do?

Nerdy's main platform, Varsity Tutors, is a freelance marketplace that enables private tutors to provide live lessons in over 3,000 K-12, professional, and adult learning subjects. It also provides free online classes that can host 500 to 50,000 students at a time.

Chegg's platform provides online research tools, online tutoring services, digital and physical textbook rentals, and other educational resources. It generates most of its revenue from subscription-based online education services, while the rest comes from textbook rentals.

How fast is Nerdy growing?

Nerdy's revenue rose 39% year over year to $98.6 million in the first nine months of 2021. It expects its revenue to grow about 35% to $140 million for the full year.

Nerdy hosted 99,287 active learners during the first nine months of 2021, up 51% from a year ago. Its revenue per active learner also increased 1% year over year to $994 as its number of online sessions jumped 99%.

But if we track Nerdy's growth over its first two quarters as a public company, we'll see that those core growth rates are actually decelerating:

Source: Nerdy. YOY = Year over year.

Nerdy is losing its momentum as more students return to school in a post-lockdown world. Its revenue per active learner also continues to decline as it provides more free classes to attract new students.

Analysts expect Nerdy's revenue to rise 34% in 2021, 39% in 2022, and 34% in 2023. Nerdy isn't profitable yet, but analysts expect it to narrow its losses in 2022 before turning profitable on an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis in 2023.

Those growth rates look impressive for a stock that trades at less than four times next year's sales, but its reputation as a pandemic stock, the market's bearishness on SPAC-backed stocks, and the inflation-driven rotation away from speculative and unprofitable tech companies could all limit Nerdy's gains throughout 2022.

How fast is Chegg growing?

Chegg's revenue rose 30% year over year to $569 million in the first nine months of 2021. But if we track its quarterly growth in subscribers and Chegg Services (which generated 85% of its revenue last quarter), we'll notice that its overall growth is also decelerating in a post-lockdown market.

Source: Chegg. YOY = Year over year.

Last November, Chegg reduced its full-year revenue forecast from 25%-26% growth to 18%-19% growth, which stunned investors because the company had previously raised its guidance in the first and second quarters.

That guidance cut -- which Chegg blamed on tough post-lockdown comparisons, a reduction in college enrollment rates, and a nationwide labor shortage disrupting lead times at its textbook rental business -- overshadowed the fact that it narrowed its net loss year over year in the first nine months as its adjusted EBITDA grew 58%.

Analysts expect Chegg's revenue to grow 19% in 2021, 10% in 2022, and 16% in 2023 as its year-over-year growth stabilizes. They also expect it to turn profitable on a generally accepted accounting principles (GAAP) basis in 2022, and for its net profit to rise 57% in 2023.

Chegg's outlook looks stable, its stock looks reasonably valued at five times next year's sales, and it launched an accelerated $300 million buyback plan last November. However, it faces many of the same macroeconomic headwinds as Nerdy, along with some other company-specific challenges.

Specifically, Chegg Study -- its biggest paid service -- has been repeatedly accused of helping students cheat by outsourcing their homework problems to online tutors in India. If regulators crack down on this practice, Chegg Services could lose a large portion of its 4.4 million subscribers. In addition, its textbook rental business could also remain a weak link if college enrollment rates remain sluggish and the labor shortages continue.

The winner: Nerdy

I'm not a fan of either education stock right now, since they'll both remain out of favor until their year-over-year comparisons stabilize. But if I had to choose one over the other, I'd buy Nerdy because it's smaller, it's growing faster, it isn't burdened by a capital-intensive textbook rental business, and it isn't being accused of helping students cheat on their homework.