Education technology company Chegg (CHGG -0.45%) thrived when millions of students were sent home to learn remotely at the pandemic's onset. Its services are helpful to college students, whether they're learning in person or remotely. Still, demand surged early in the pandemic.

But now that campuses are reopening and welcoming students back in classrooms, Chegg has noticed a temporary slowdown. It turns out students were not so enthusiastic about returning to school -- period -- whether from home or in crowded classrooms with a potentially deadly virus circulating at uncomfortably high numbers. Indeed, college enrollment is down 6.6% over the last two years.

Despite these near-term trends, Chegg CEO Dan Rosensweig sounded optimistic about the company's prospects at an investor conference on March 9. Let's see whether investors should be too.

A person doing homework in a library.

Image source: Getty Images.

Chegg CEO is optimistic about company's prospects 

Chegg is an international business, serving college students in the U.S. and abroad. As of its most recent quarter (ended Dec. 31, 2021), it had 6.2 million and 1.5 million subscribers from the U.S. and international segments, respectively.

Interestingly, Chegg has attracted international subscribers despite not having the ability to offer country-specific pricing. As you might imagine, that could make it unaffordable for many students in lower-income countries who might otherwise purchase a subscription. That's one of the reasons why Rosensweig is optimistic about Chegg's prospects in 2022 and beyond. By the end of this year, it will have completed its local-level pricing rollout, which he expects will boost international subscriber growth for several years.

Another reason for optimism is Chegg's decision to divest from the physical textbook business. The company was offering this service to students at a break-even rate to deepen customer relationships and perhaps acquire incremental subscribers. However, students are less interested in physical copies now that digital books are more common. The declining trend and rising shipping expenses were the nails in the coffin for Chegg's textbook business.

The presence of that business slowed Chegg's overall revenue growth rates and profit margin. For instance, Chegg's services business has grown from $129 million in 2016 to an estimated $780 million for 2022. Meanwhile, its required materials segment, including textbooks, fell from $70 million to $60 million.

Finally, Rosensweig highlighted Chegg's inherently profitable business model. It owns 75 million pieces of proprietary content in the form of study materials. When students need help, they go to search engines to look up their questions; if Chegg has material on the topic, it pops up. A few clicks later, Chegg potentially has a new subscriber, and the student has the help they need. No expensive marketing campaigns are needed.

Indeed, Rosensweig noted that Chegg's customer acquisition cost is only $3.50. Chegg's basic study subscription costs $14.99 per month. It's no surprise then that the company has grown its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by a compound annual rate of 52% from 2016 to 2022 (based on 2022 estimates).  

A great time to buy Chegg 

Fortunately for investors, the near-term headwinds with students reluctant to take college courses on campus have Chegg stock selling cheaply. At a price-to-free-cash-flow multiple of about 26, this is the lowest the stock has sold for in the last five years. If you have not already done so, now might be a great time to add shares of Chegg to your portfolio.