Education technology company Chegg (CHGG 1.35%) primarily serves college students. It has done an excellent job of capturing this market by delivering students high-quality content.
However, serving such a niche category limits Chegg's long-run potential. Thankfully for shareholders, management is taking steps to address this concern. Let's look at Chegg's core market potential and its efforts to expand its reach.
Chegg is looking beyond its core market
According to National Clearinghouse Research Center, there were 17.1 million undergraduate and graduate students in the U.S. in the fall semester of 2021. That is undoubtedly Chegg's core market, which it has made considerable progress capturing. In its most recent quarter ended Dec. 31, 2021, Chegg reported 6.2 million services subscribers from the U.S.
Internationally, Chegg has not saturated its market as much. According to internal and external estimates, there are 56 million college-level students outside of the U.S. At the end of the fourth quarter, Chegg boasted 1.5 million international subscribers. Interestingly, Chegg is not yet equipped to offer country-specific pricing. For instance, students in India are paying the same prices for Chegg's services as those in the U.S. Yet the average per-capita income in India is much lower than in the U.S.
Another step that could increase its potential involves Chegg's efforts to acquire language learning company Busuu. The deal is expected to close sometime this quarter. Chegg management said it believes the digital language learning market is worth $17 billion and growing fast. Chegg also noted that 55% of college students expressed an interest in learning a new language. The move can be an excellent way for Chegg to extend its customer relationships. Before the acquisition, there was little need for subscribers to continue with Chegg after they completed their course curriculum. Now, those subscribers who have had a good experience with Chegg have an option to stick around longer and keep learning.
Management expects the Busuu purchase to lower adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by $15 million to $20 million in 2022. It also said it expects the acquisition to be break-even for earnings by 2024.
Finally, Chegg is also expanding into the skills-building market. It now offers high-quality online skills-based courses in software engineering, data analytics, and data science. The decision is another one that expands Chegg's business to extend customer relationships.
What this could mean for Chegg investors
Chegg is doing an excellent job serving its core market of U.S. college students. That's evidenced by the large and growing market share in the region. Further, it strengthens its competitive position by increasing its treasure trove of proprietary content. And already, it is demonstrating economies of scale, expanding adjusted EBITDA by a compound annual rate of 52% from 2016 to 2022 (2022 is an estimate).
However, one of the potential arguments against investing in Chegg's stock is that it is serving a small market and has already taken a significant piece of that market. By taking action to expand its customer relationships beyond their college years, Chegg could potentially increase its total addressable market and prolong healthy revenue growth for several years.