Chegg (CHGG +0.98%) is an education technology company that primarily serves college students. As a result, it is dependent on the total enrollment levels at colleges. With fewer students, it leaves a smaller market for Chegg to capture.
That is precisely what has happened in the U.S. since the pandemic's onset. That's understandable. Shooting for a college degree is challenging already, but even more so during a pandemic. Given that backdrop, it's not surprising that in the U.S., one million students have forgone or postponed a college education over the last two years. Let's look closer at the effect it's having on Chegg.
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Declining college enrollment is a challenge
Note Chegg runs on a subscription business model. Students pay between $15 to $20 per month to access the Chegg learning platform. In return, the curious minds can learn from Chegg's 79 million pieces of proprietary content (typically step-by-step solutions to commonly asked questions). Additionally, for queries Chegg does not already have, students can ask 20 questions per month -- answered by Chegg's subject-matter experts. This is how Chegg has built the treasure trove of assets.
NYSE: CHGG
Key Data Points
Chegg is popular among college students, and it captures a meaningful share of the market in the U.S. Indeed, it boasted 6.2 million subscribers as of its most recent update. According to the National Student Clearinghouse Research Center, there were 17.1 million U.S. undergraduate and graduate students in the fall of 2021. From those figures, Chegg claims an estimated 36% market share in the U.S. Therefore, a decrease in enrollment is meaningfully negative.
Chegg CEO Dan Rosensweig elaborated on the trend in prepared remarks on May 2:
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.
Indeed, taking the estimated market share figure from earlier and multiplying it by 1 million highlights that Chegg could have had 360,000 more subscribers had it not been for the decline. Multiplying by the lower end of the subscription amount ($15) shows that Chegg's monthly revenue is an estimated $5.4 million lower. To put that figure into context, Chegg earned $776 million in revenue in 2021.
CHGG Revenue (Annual) data by YCharts
Chegg's stock is a bargain
Considering the meaningfully negative effect, it's no surprise that Chegg's stock fell off its highs in 2021. Still, a college degree is a highly sought-after designation, and the selling may be overdone. The job market is not likely to remain as hot as it's been since the economic reopening began. Several companies offered increased wages, sign-on bonuses, flexible schedules, child care, and more to entice workers to join. This is after businesses shed millions of employees at the pandemic's onset when non-essential locations were forced to close temporarily.
CHGG Price to Free Cash Flow data by YCharts
In the longer run, college enrollment is likely to rebound, and Chegg will be in a position to capitalize. Meanwhile, long-term investors could buy Chegg's stock today at a bargain valuation in anticipation of the rebound.
