World economies are showing signs of faltering. The pandemic is snarling supply chains, reducing output and making it more expensive to transport goods. Businesses are passing along the higher prices to consumers, who have started to balk at the increases. Households are no longer flush with disposable income as the benefits from stimulus checks are fading.
Meanwhile, the Federal Reserve is raising interest rates to reduce demand further and cool the economy to bring down inflation. All these factors are increasing the risks of recession in the near term.
Typically in times of recession, college enrollment increases as folks find it a worthwhile endeavor with jobs less plentiful. According to the U.S. Census Bureau, The Great Recession of 2007 to 2009 helped create a surge in higher-education enrollment.
With that backdrop, investors looking to protect their portfolios from a potential recession can consider adding education technology company Chegg (CHGG -3.92%) to their portfolios.
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Chegg has a strong competitive moat
Chegg primarily serves college students. The company operates on a subscription business model where students pay a monthly fee between $15 and $20 to access the service. As part of a subscription, students get to ask 20 questions per month, answered by Chegg's subject-matter experts, usually within hours. These questions and step-by-step explanations are then made available for all of Chegg's subscribers, present and future, from which they can benefit as well.
Indeed, this treasure trove of content attracts students to Chegg. As of its most recent quarter, which ended on March 31, it had 79 million pieces of this proprietary content. The company had 5.4 million subscribers in that same time. If jobs become more scarce because of a recession, students could enroll in more courses, which would boost Chegg's prospects.
That would be a reversal of recent enrollment trends. In the company's earnings release on May 2, CEO Dan Rosensweig observed:
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. The impact of these factors is evident in the reduced traffic to higher-education support services.
Companies have found it challenging to hire enough staff to serve robust consumer demand following economic reopening. As a result, businesses have offered rising wages, bonuses, and other enticing benefits to lure workers. With plenty of jobs available and rising pay, more college-age individuals choose to work instead of taking higher-education courses.
CHGG revenue (annual). Data by YCharts.
Possible portfolio protection during a recession
However, if a recession were to occur and jobs become less plentiful, it could increase student interest in signing up for college courses. And this, in turn, would provide Chegg with a larger pool of customers to attract. In that way, Chegg's business could provide your portfolio some protection during a recession.
Looking out longer term, Chegg has grown revenue from $256 million to $776 million from 2013 to 2021. Meanwhile, its proprietary content is a low-cost customer acquisition tool that has allowed its operating income to surge from a $70 million loss to a $78 million profit in that same time. Earning a college education is a highly sought-after accomplishment that will attract students for decades. Chegg's foundation is its many millions of pieces of content that will be expensive and time-consuming for competitors to replicate.
CHGG price-to-free-cash-flow ratio. Data by YCharts. P/S = price-to-sales ratio.
Additionally, the broad market sell-off has the stock trading cheaper than ever (see chart above). For those reasons, investors worried about an economic recession could reinforce their portfolios by adding Chegg shares.
