Chegg (CHGG -0.29%) reported operating results on Aug. 4 that revealed a widening of its competitive advantage. The education technology company runs a subscription business for college students who pay to access its proprietary content.
That valuable material is what attracts customers. Chegg added millions of pieces of new material in its most recent quarter, making it harder for competitors to encroach on its business.
Chegg has built a valuable content database
Interestingly, as of June 30 (the end of its second quarter), Chegg boasted 84 million pieces of this proprietary content. That figure was five million higher than the 79 million it had at the end of the previous quarter. These are primarily step-by-step solutions to problems students must learn to solve to pass their courses. As part of a monthly subscription, students get to ask 20 questions per month that Chegg's subject-matter experts answer. The question and answer become available for all students to view. It has taken Chegg years to build its database with this meticulous approach.
Chegg's content is created to serve the precise material students need help with. In some ways, it's an opposite model from a content creator like Netflix, which spends billions of dollars on movies and series that it can only hope viewers will appreciate. Netflix uses sophisticated data measurements and subscriber habits to determine what content viewers will like. Chegg doesn't need to work as hard -- students ask it for the exact content they want.
CHGG Operating Income (Annual) data by YCharts.
As you might imagine, this business model reduces waste in content spending. As an added benefit, the material is long-lasting, lowering Chegg's expenses as it grows its content database. The higher education curriculum does not change much over time. Calculating derivatives has been the same for centuries. Indeed, that is evident in Chegg's financial results, as its operating income has grown from $18 million to $78 million from 2019 to 2021.
A great time to buy Chegg stock
CHGG Price to Free Cash Flow data by YCharts.
That Chegg expanded its content database is excellent news for shareholders. For investors who don't own Chegg, it's a great time to consider buying the stock. Trading at a price-to-free cash flow ratio of 18, it's relatively cheap. Notably, the price-to-free cash flow ratio is one of the most informative valuation metrics. It measures investors' willingness to pay per dollar of free cash flow of a business.
The downside to investing in Chegg is its small total addressable market. It primarily serves college students, so its market potential is limited to the size of the student population. Chegg may not be for investors looking to multiply their money tenfold, but it offers the potential for a solid return on investment at its current valuation.
