Metric loss

Against Popular Sentiment, Here’s 1 Metric I’m Watching to Assess Chegg’s Investment Value

Chegg (CHGG 2.77%) is expected to report its first quarter 2022 results after markets close on May 2. The education technology company, which primarily serves students, flourished early in the pandemic when students were learning remotely.

When colleges began bringing students back to campus, the company struggled to maintain momentum. Interestingly, students taking classes on campus can still benefit from Chegg’s services. Regardless of short-term trading swings, here’s a metric I’ll be watching when Chegg releases its first quarter results next week.

Image source: Getty Images.

Chegg has a treasure trove of content assets

Note that Chegg runs a subscription business. It offers students (primarily those in college) access to its website and platform for a monthly fee of $15-$20. As part of a subscription, students can ask 20 questions per month that are answered by Chegg’s subject matter experts. These questions and answers also become available to the rest of the Chegg members.

Over the years, Chegg has accumulated 75 million exclusive content. This treasure trove of content is the key to Chegg’s competitive edge. It would take years and cost a competitor millions of dollars to duplicate it. For that reason, it’s the only crucial metric I’ll be tracking in Chegg’s first-quarter earnings report.

Plus, content has the added benefit of being a low-cost acquisition tool. Students who are stuck in the middle of their studies often go to search engines and type in the concept they are trying to understand. If Chegg has the content available, it appears accordingly. A few clicks and a payment method later, Chegg has a new subscriber, and the student has help. This reduces the need for a costly advertising campaign and has undoubtedly helped Chegg grow its operating profit from a $57 million loss in 2015 to $78 million in 2021.

Chart showing Chegg's increase in operating profit since 2015.

Operating result CHGG (TTM) given by Y-Charts

Colleges that bring students back to classrooms are a headwind for business in the short term. But its content is useful for students, whether they are taking lessons from home or in person. The problem is that fewer students are enrolling in college courses and those who do have enrolled in fewer courses. Earning a college degree is difficult under normal circumstances; the addition of a potentially deadly virus makes the task even more difficult. Understandably, many students take a step back.

Nonetheless, management expects revenue of $200 million to $205 million for the first quarter. While this signals a slowdown in growth, it follows a period of the pandemic when revenue jumped 63% for three quarters.

What this could mean for Chegg investors

Wall Street analysts expect Chegg to report revenue of $201.28 million and earnings per share (EPS) of $0.24. If the company achieves these projections, it will represent an increase of 1.5% and a decrease of 14.29%, respectively, compared to the same period the previous year.

Graph showing Chegg's price decline against free cash flow since 2021.

CHGG Price vs. Free Cash Flow given by Y-Charts

Investors are worried about slowing growth and the stock has tumbled 77% from its peak. This creates an opportunity for long-term investors to buy Chegg at its lowest ever price-to-cash flow ratio.