At the end of last year, I recommended Chegg (CHGG 1.03%) as my top pick for 2022. The stock of the education technology company was coming off an abysmal end to 2021 due to a temporary factor.
The new year was proving a challenging one until Chegg reported earnings results that surprised the market. The stock surged following the report. Let's look at what was so impressive about Chegg's Q4 earnings figures and determine if it's still a buy for 2022.
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Chegg gives shareholders a sigh of relief
Chegg reported revenue for its fourth quarter that ended Dec. 31 of $207.5 million, an increase of 1% from the same quarter last year. That was better than the 5% decrease in revenue that analysts on Wall Street were expecting. Interestingly, the market expected sales to fall after management delivered pessimistic guidance at the end of 2021. Chegg noted that college enrollment fell significantly and that registered students were taking fewer and easier courses. For an education technology company that helps college students get through their coursework, the aforementioned trends are bad news.
That said, student engagement rebounded quickly in Chegg's next quarter, to its own surprise. The return to growth gave management confidence to issue guidance for 2022 that called for revenue of $840 million, which would be a healthy increase from the $776 million it generated in 2021. Both Chegg's first-quarter revenue and estimate for 2022 came in ahead of analyst expectations.
The reversal from the pessimistic guidance in just one quarter is what caused Chegg's stock to bounce sharply higher after the announcement.
Is Chegg stock a buy right now?
What attracted me to Chegg in the first place is the excellent value it provides college students, and the progress it made in capturing that market in the U.S. Furthermore, the company's competitive position is strong with over 75 million pieces of proprietary content it has spent years creating. If another company wanted to encroach on its business, it would be costly and take years. And that business is becoming increasingly profitable, growing from an operating loss of $70 million in 2014 to an operating income of $78 million in 2021.
The stock crashed by more than 50% following the news management revealed on the effects of decreasing college enrollment on its business. That brought its valuation to near its lowest levels when measured by price to sales and price to free cash flow.
Even after the boost in price after it reported earnings, Chegg is trading at a price to free cash flow and price to sales that are the lowest since 2018. Meanwhile, its business has strengthened its competitive position by adding proprietary content and raising operating income from a negative $6 million in 2018 to $78 million in 2021. To answer my own question, yes, Chegg stock still looks like an attractive value after reporting earnings results.
