Late in December, I wrote that if I could only buy one stock in 2022, it would be Chegg (CHGG 1.88%). The education technology company has a long-lasting competitive advantage that will be difficult to overcome.
And due to short-term student behavioral factors caused by the changing dynamics of the pandemic, the stock got hammered in 2021, creating an attractive entry point for investors to buy. Since I wrote that article, the omicron variant has taken hold, and COVID-19 cases are surging. Which has led to several universities starting the spring semester with remote instruction. Here's why that's one more reason to buy Chegg stock for 2022.
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Chegg has a strong competitive advantage
Before I dive into the potential effects of the omicron variant, let me briefly restate why Chegg is an excellent long-term investment. The company primarily assists college students with their course curriculum. Chegg has over 70 million pieces of proprietary content.
Chegg creates this content organically from student requests. As part of a monthly subscription to Chegg, students get to ask 20 questions answered by subject-matter experts. These questions and explanations are then available for all Chegg's subscribers to view. This strategy is expensive to build out, as evidenced by Chegg's losses in operating profits from 2011 to 2018. However, Chegg finally reached sufficient scale to generate operating income of $18 million in 2019 and $57 million in 2020. It will be expensive and time-consuming for any competitor to encroach on Chegg's business.
Moreover, short-term headwinds caused Chegg's stock price to crash and it's now selling relatively cheaply. Its price-to-sales ratio of 5.4 and price-to-free cash flow of 25.4 are near the lowest the company has sold at in the last five years. That's relatively cheap considering the moat that Chegg has built with proprietary content over that time and its progress on profitability.
The crash came after Chegg experienced slower-than-expected growth in its most recent quarter ended Sept. 30. It turns out that when colleges in the U.S. offered fewer online courses and asked students to come back to campus to take in-person classes, enrollments declined. Those who returned to campus are taking fewer and easier courses, reducing their need for assistance. That's understandable. Taking a college course is complicated enough on its own. Now add a potentially deadly virus to the mix, and it adds stress to a group already overwhelmed.
Chegg is an excellent business at a bargain price
The rise in COVID-19 infection caused by the omicron variant led colleges to rethink classroom learning. Several colleges have announced that instruction will begin remotely for the first few weeks of the spring semester. So why is that another reason to invest in Chegg? The move may give students confidence that colleges will not bring them back to classrooms when the threat level of infection is high. The trust, in turn, could lead to students registering for more courses than they otherwise would have. And finally, with students taking more classes, the demand for Chegg's services could increase.
This was, after all, the reason the stock crashed late last year. The reversal of this trend could be the catalyst that lifts the stock higher in the near term. Regardless, Chegg is an excellent company with a long-term competitive advantage selling at a bargain price. Increasing enrollment in the near term is just icing on the cake.
