Chegg (CHGG 3.20%) took investors on a wild ride over the past decade. The online education company went public at $12.50 in November 2013, and its stock eventually hit an all-time high of $113.51 on Feb. 12, 2021.
But today it's only worth about $10 a share. Therefore, a $1,000 investment in Chegg would have briefly blossomed to more than $9,000 before withering to about $800 today, Does the end of that roundtrip mean it's too late to buy Chegg's stock? Or does it still hold some value for patient investors who can look past all its near-term challenges?
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Why did Chegg return to its IPO price?
Chegg generates most of its revenue from its subscription-based online education and tutoring services. A smaller percentage comes from its textbook rental service.
Its revenue rose 28% in 2019, then accelerated to 57% growth in 2020 as the pandemic drove more students to take its online classes and tutoring sessions. That acceleration dazzled the bulls, and the buying frenzy in growth and meme stocks in early 2021 propelled Chegg's stock to its all-time high. But at its peak, Chegg's enterprise value reached $15 billion -- a whopping 19 times the revenue it would actually generate in 2021.
Chegg's bubbly valuation became unsustainable as its growth cooled off in a post-pandemic market. Fewer students attended its online courses as they returned to school, while lower college enrollment rates and labor shortages curbed the growth of its textbook rental service. The critics also claimed that Chegg Study, the "homework help" division of its Chegg Services platform, actively encouraged students to cheat by outsourcing their homework problems to online tutors.
As a result, Chegg's revenue only rose 20% in 2021. In 2022, its revenue declined 1% to $767 million as its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) fell 4% to $255 million. CFO Andy Brown attributed that slowdown to "external macro factors, including reduced enrollments and uncertain economic conditions."
Chegg's revenue declined another 7% year over year in the first quarter of 2023, and it expects that slowdown to deepen with a 9%-10% year-over-year drop in revenue in the second quarter. For the full year, analysts expect its revenue and adjusted EBITDA to fall 9% and 15%, respectively.
It could be permanently disrupted by AI platforms
Chegg's top- and bottom-line declines were already disappointing, but the rise of generative AI platforms like ChatGPT raise even more red flags for its long-term growth potential. During its first-quarter conference call on May 1, CEO Dan Rosensweig said that starting in March, the company saw a "significant spike in student interest in ChatGPT" and that shift was "having an impact" on its new customer growth. That chilling statement, which implies Chegg's online tutoring business could be disrupted by ChatGPT, caused its stock price to plummet 48% on May 2.
To make matters worse, top tech companies are expanding their ecosystems with generative AI features to capitalize on that technological shift. Microsoft has already integrated ChatGPT into its Bing search engine, while Alphabet's Google launched its own generative AI chatbot, Bard, back in March.
Is its stock too cheap to ignore?
With an enterprise value of $1.06 billion, Chegg looks cheap at 1.5 times this year's sales and 4.9 times its adjusted EBITDA. But that discount also reflects the fears of an AI-driven disruption of the online education market over the next few years.
In short, I believe it's too late to buy Chegg's stock -- even at a discount to its IPO price -- because it clearly faces existential challenges. It could gradually streamline and improve its own platform with generative AI tools, but the underlying technology still undermines its own business model and could limit its ability to gain new customers.
