Chegg (CHGG 0.22%) is scheduled to report first-quarter 2022 earnings after the markets close on May 2. The education technology company, which primarily serves college students, thrived at the pandemic's onset when students were learning remotely.
As colleges began bringing students back on campus, the company struggled to maintain momentum. Interestingly, students taking courses on campus can still benefit from Chegg's services. Regardless of the short-term business fluctuation, here's one metric I will be watching when Chegg reports first-quarter earnings next week.
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Chegg has a treasure trove of content assets
Note that Chegg runs a subscription business. It offers students (mostly those in college) access to its website and platform for a monthly fee of $15 to $20. As part of a subscription, students get to ask 20 questions per month that are answered by Chegg's subject-matter experts. Those questions and answers become available for the rest of Chegg's members to view and learn from as well.
Over the years, Chegg has accumulated 75 million pieces of proprietary content. This treasure trove of content is the key to Chegg's competitive advantage. It would take years and cost millions of dollars for a competitor to duplicate. For that reason, it is the one crucial metric I will be following in Chegg's Q1 earnings report.
Moreover, the content has the added benefit of being a low-cost acquisition tool. Students who get stuck in the middle of their studying often go to search engines and type out the concept they are seeking to understand. If Chegg has the content available, it pops up as a result. A few clicks and a payment method later, Chegg has a new subscriber, and the student has the help. It reduces the need for an expensive advertising campaign and has undoubtedly helped Chegg grow operating income from a loss of $57 million in 2015 to a positive $78 million in 2021.
CHGG Operating Income (TTM) data by YCharts
Colleges bringing students back to classrooms is a headwind for the company in the near term. But its content is helpful for students, whether they take courses at home or in person. The trouble is that fewer students are registering for college courses, and those who do have signed up for fewer courses. Completing a college degree is challenging under normal circumstances; adding a potentially deadly virus makes it even more difficult. Understandably, many students are taking a step back.
Nevertheless, management expects revenue of $200 million to $205 million for the first quarter. While this signals slowing growth, it follows an era during the pandemic where revenue surged as much as 63% for three quarters.
What this could mean for Chegg investors
Analysts on Wall Street expect Chegg to report revenue of $201.28 million and earnings per share (EPS) of $0.24. If the company meets those projections, it will represent an increase of 1.5% and a decrease of 14.29%, respectively, from the same period the year before.
CHGG Price to Free Cash Flow data by YCharts
Investors are concerned about the slowing growth, and the stock has crashed 77% off its high. That's creating an opportunity for long-term investors to buy Chegg at its lowest price-to-cash-flow ratio ever.
