This year, equity markets are performing better than in 2022 despite lingering economic issues and, potentially, a recession on the way. However, some stocks continue to struggle mightily. That's the case with cannabis company SNDL (SNDL 1.12%) and online learning platform Chegg (CHGG 2.90%).
Both businesses have substantially underperformed the S&P 500 year to date. There are good reasons for that, as SNDL and Chegg face some uncertainty that should make most investors stay a safe distance away from both, at least for now. Let's dig deeper.
1. SNDL
Canadian cannabis companies have faced severe headwinds over the past couple of years. They have generally struggled to grow their revenue and have recorded consistent losses. SNDL has somewhat managed to avoid these issues by diversifying away from its cannabis operations and getting into the liquor retail business. In 2022, the company's revenue soared by 1,170% year over year to $712.2 million, but that was almost entirely due to acquisitions.
NASDAQ: SNDL
Key Data Points
Although it now generates most of its revenue from its liquor retail operations, SNDL isn't giving up on the cannabis market. In fact, the company announced important news in its latest update. SNDL is planning to become the majority owner of at least one cannabis multistate operator (MSO) in the U.S. in 2023. Entering the U.S. pot market would further diversify SNDL's business away from its Canadian cannabis operations that have proved unimpressive.
Still, the company remains a risky bet. First, SNDL is still unprofitable; the company's net loss of $372.4 million in 2022 was worse than the loss of $226.8 million reported in the previous fiscal year. Some of that loss was due to non-cash impairment charges related to acquisitions. Still, it isn't as though SNDL has a history of profitability. Although it might be acceptable to ignore the red ink on the bottom line if sales are growing rapidly, SNDL's aren't doing so organically.
Before the company's shares become attractive, it must prove that it can perform consistently well on an organic basis. Can SNDL's decision to invest in U.S.-based MSOs be the move that leads to sustained excellent financial results? It's too early to tell, and there are reasons to be at least somewhat skeptical. Even in the U.S., marijuana companies have struggled due to stiff competition, oversupply, and a still-challenging legal landscape.
A lingering illegal market in the U.S. is also eating into the market share of legal cannabis companies. SNDL will have to overcome all these problems. Meanwhile, the company's stock continues to plunge; its share price is currently $1.56. If this keeps up, the company might need to resort to yet another reverse stock split, just like it did last year, to get its stock price above $1 and remain listed on the Nasdaq.
Although stock splits don't fundamentally change the prospects of a business, investors still frown upon them. With all that going on, SNDL hardly looks like an attractive stock to buy, which is why investors should stay away from the company right now.
2. Chegg
Technological innovations can sometimes change the landscape of an industry and disrupt the prospects of otherwise solid corporations. That's what may be happening with Chegg. The company runs an educational support platform that helps students with homework solutions, expert answers to textbook problems, and more. Chegg's services have been somewhat popular, but the rise of AI chatbots like ChatGPT could change that.
NYSE: CHGG
Key Data Points
ChatGPT can answer relatively complex questions. How complex? According to a White Paper, GPT-4 passed a simulated bar exam delivering a score in the top 10% of test takers. If AI can already pass the bar exam, many queries the average college student would have are within its field of expertise. In the company's latest quarterly update, Chegg's CEO, Dan Rosensweig, said, "Since March we saw a significant spike in student interest in ChatGPT. We now believe it's having an impact on our new customer growth rate."
Chegg's revenue in the first quarter declined by 7% year over year to $187.6 million. Revenue from Chegg's subscription service dropped by 3% year over year to $168.4 million. And Chegg's subscription-services subscribers came in at 5.1 million for the quarter, 5% lower than the year-ago period. Chegg divested its required-materials unit last year, which offered print textbook rentals, among other services.
That partly explains its top-line decline in the first quarter but not entirely. Chegg's revenue and subscription growth have also slowed compared to the highs it reached earlier in the pandemic. But it isn't a deal breaker as long as the company can bounce back. After all, Chegg estimates a market of 100 million students who could benefit from its services.
And with the company's decision to divest its required-materials business, which carried lower margins, the focus on subscription services would lead to stronger margins over time so long as it can keep adding new subscribers and increasing its revenue. However, AI will now make that task more difficult for Chegg. Management is planning to use AI to its advantage by launching CheggMate, an AI-powered study helper.
In my view, this is a promising endeavor, but until Chegg shows it can fend off the threat from AI, I think it is best to stay away from the stock. Perhaps Chegg's shares will again be worth investing in down the line.
