Is Chegg Stock a Buy Now?

Chegg (CHGG 0.15%) stock rallied 16% after the online education company posted its fourth-quarter earnings report.

Revenue rose 1% year over year to $207.5 million, which beat analysts' expectations for $192.5 million and management's guidance for a 5% to 6% decline. Its adjusted net income declined 18% to $63.5 million, or $0.38 per share, which also beat expectations by $0.07.

The market's response to Chegg's fourth-quarter earnings was much warmer than its reaction to the prior report in November when the stock lost nearly half its value in a single day. However, Chegg stock remains nearly 75% below its all-time high from last February.

Image source: Getty Images.

Should investors consider picking up shares of Chegg after its post-earnings bounce? Let's find out.

Chegg's post-lockdown slowdown

Chegg Services, which hosts the company's subscription-based online education and tutoring services, accounted for 86% of total revenue in 2021. The rest came from its Required Materials division, which handles textbook rentals.

The pandemic generated tailwinds for both segments in 2020 as more students stayed at home and attended online classes.

Data source: Chegg 10-K filings. YOY = year-over-year.

But those tailwinds weakened throughout 2021 as more schools reopened. Lower college enrollment rates and labor shortages exacerbated that slowdown at its Required Materials division.

Nonetheless, Chegg still ended the year with 7.8 million Chegg Services subscribers, which represented an 18% jump from 2020. Its gross margin fell one percentage point to 67% in 2021, but its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin still expanded from 32% to 34% as the company reined in operating expenses.

The slowdown will continue in 2022

Chegg expects revenue to rise 1% to 3% year over year in the first quarter of 2022, and 7% to 9% for the full year.

Management is also guiding for gross margin to land between 70% and 72% this year. It attributes that expansion to a higher mix of revenue from Chegg Services, which will reduce the company's overall dependence on the lower-margin Required Materials segment.

However, adjusted EBITDA margin could dip to 28% in the first quarter and 32% for the year as Chegg ramps up its investments in Busuu, the language learning platform it acquired last month.

Based on that outlook, Chegg believes its adjusted EBITDA will be roughly flat year over year in the first quarter and 2022 overall.

An unappealing valuation and long-term challenges

Chegg stock trades at 28 times forward earnings estimates and over five times revenue. Those valuations would be reasonable for a growing company, but they're not supported by Chegg's guidance for single-digit top-line growth and flat earnings.

Investors can easily find faster-growing stocks with comparable valuations in this market. Alphabet trades at 24 times forward earnings, but analysts expect it to generate stronger revenue and earnings growth than Chegg this year. Online-education company Coursera isn't profitable, but it generates superior sales growth. Its stock trades at six times sales.

Meanwhile, Chegg's critics continue to assert that Chegg Study, the "homework help" division of its Chegg Services platform, helps students cheat by outsourcing their homework problems to online tutors. Those criticisms may force Chegg to enforce tighter academic-honesty controls across its platform, potentially reducing its overall popularity.

There aren't any compelling reasons to buy Chegg now

Chegg stock got overheated during the rally in growth stocks in early 2021. At its all-time high, shares raded at over 90 times earnings, which was clearly an unsustainable valuation for the company as it moved beyond pandemic lockdowns.

Therefore, Chegg's subsequent decline merely reset its valuation, and its sluggish growth expectations for 2022 indicate it could have even more downside. Investors should avoid Chegg and focus on stronger tech companies instead.