Chegg (CHGG 0.15%) reported first-quarter 2022 results after the markets closed on Monday, May 2. The education technology company saw its growth rate decline to just 2% in the first quarter ended in March.
The pandemic's start fueled revenue and engagement as millions of students learned remotely, and on-campus support services like tutoring were paused. As colleges started bringing students back in person, some balked at the idea of crowded classrooms with a potentially deadly virus still circulating. The fall in enrollment decreases demand for support services like Chegg, and it's creating a headwind for 2022.
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Chegg lowers revenue target for 2022
Chegg reported total net revenue of $202.2 million in Q1. That was 2% higher than at the same time last year. Keep in mind that Chegg's services can be helpful to students taking in-person and online classes; the slowdown in growth is more attributable to a decrease in enrollment than the change in the learning method.
Chegg CEO Dan Rosensweig elaborated on the trend in the company's earnings release on May 2:
Students continue to take fewer classes and those they do take are often less rigorous, with fewer or more limited assignments. With higher wages and increased cost of living, more people are shifting their priorities toward earning over learning, resulting in a lower course load, or delaying enrollment in school at this time. In the U.S. alone, we have seen approximately 1 million students forgo or postpone higher education over the last two years.
CHGG Revenue (Annual) data by YCharts
The 2% revenue growth rate is in stark contrast to the 56.8% it grew in 2020 or even the 20.5% in 2021. Still, the company has more than doubled revenue since 2018, so a slowdown is to be expected following the elevated rates of increase during the initial stages of the pandemic. Nevertheless, the decrease led management to lower expectations for 2022. It now expects revenue of $755 million at the midpoint. Previously, it had guided investors to a midpoint target of $840 million.
Chegg stock crashes after earnings
As you might imagine, the market did not take this news well, and the stock was down as much as 30% on the day following the announcement. Fortunately for shareholders like myself, the stock bounced back, recovering half of those losses. The sell-off continues the downtrend, and Chegg's stock is now down 82% off its high. At a price-to-free cash flow multiple of 18 and price-to-sales multiple of 3.9, it's the lowest the stock has been trading for in years.
CHGG Price to Free Cash Flow data by YCharts
Meanwhile, the company has added to its competitive advantage and now boasts 79 million pieces of proprietary content. This material attracts subscribers to Chegg and is created in response to student requests. Investors willing to stomach the short-term headwinds can add Chegg to their portfolios at this bargain valuation.
