There was a lot to digest from the education technology company Chegg (CHGG -1.98%) when it reported fourth-quarter operating results (for the quarter ending Dec. 31) on Feb. 7. But one figure in the report worth investors' attention is the growth in proprietary content.
Chegg's stock price jumped by 15% on the day following the report, primarily because revenue in Q4 came in better than expected, and management told investors that the revenue momentum is likely to continue throughout the year.
Understandably, top-line figures were capturing headlines, but here's why investors should not overlook proprietary content growth. It's a critical figure.
Image source: Getty Images.
Chegg's proprietary content secures a competitive advantage
The most attractive subscription Chegg offers to students is Chegg Study. The service costs roughly $15 per month. As part of the subscription, students get the privilege to ask 20 questions per month about the topics they are studying. These are answered by Chegg's subject-matter experts, who give step-by-step guidelines on how to solve the problem in question. The explanation and question are then made available for all of Chegg's subscribers (present and future) to review and potentially learn from.
This content is made from organic student demand, making it that much more valuable. It's precisely what students asked for rather than generic info that may not be suited to individual students' needs. Chegg now boasts over 75 million pieces of this type of content. That's up by 5 million from the previous quarter. This focused material is what attracts subscribers to join Chegg. So far, that is working well. As of the end of Q4, Chegg had 7.8 million services subscribers, up by 18% from the same time the year before.
Interestingly, out of that 7.8 million, 6.2 million are from the United States. Undoubtedly, Chegg's proprietary content is the competitive advantage that allows it to capture such a large share of the U.S. market. Indeed, according to National Clearinghouse Research Center, at the end of 2021, there were 17.1 million college students in the U.S. Based on Chegg's 6.2 million U.S. subscribers, it has already taken 36.2% of its total addressable market in the U.S.
Chegg has ambitions to make similar increases in market share internationally. It is working on removing barriers international students face when subscribing to Chegg. First, it is translating content into more languages. And later this year, it will offer country-specific pricing, surprisingly a feature it does not yet have. Already, Chegg has 1.5 million international subscribers; as it develops the business to accommodate regions better, it could propel growth further.
Chegg's content lowers customer acquisition costs
In addition to providing excellent value to students, the content helps attract new subscribers at a low cost. When students work on a homework assignment or study a concept and get stuck, they often search the internet for explanations. If Chegg has the content they are looking for, its website pops up. A few clicks later, Chegg has a new subscriber, and the student has the help they were searching for.
The business model's profitability is highlighted through Chegg's rapid adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) growth. From 2016 to 2021, Chegg has grown adjusted EBITDA more than 12-fold, from $21 million to $265 million.
For those reasons, investors should not overlook the one crucial metric from Chegg's quarterly earnings results.
