Chegg has been treading water for the past six months, recording a small return of 0.5% while holding steady at $0.96. The stock also fell short of the S&P 500’s 9% gain during that period.
Is now the time to buy Chegg, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Chegg Will Underperform?
We don’t have much confidence in Chegg. Here are three reasons why there are better opportunities than CHGG, plus one stock we’d rather own.
1. Declining Services Subscribers Reflect Product Weakness
As a subscription-based app, Chegg generates revenue growth by expanding both its subscriber base and the amount each subscriber spends over time.
Chegg struggled with new customer acquisition over the last two years as its services subscribers have declined by 23.3% annually. This performance isn’t ideal because internet usage is secular, meaning there are typically unaddressed market opportunities. If Chegg wants to accelerate growth, it likely needs to enhance the appeal of its current offerings or innovate with new products. 
2. Shrinking EBITDA Margin
Operating income is often evaluated to assess a company’s underlying profitability. In a similar vein, EBITDA is used to analyze consumer internet companies because it excludes various one-time or non-cash expenses (depreciation), providing a clearer view of the business’s profit potential.
Analyzing the trend in its profitability, Chegg’s EBITDA margin decreased by 12.9 percentage points over the last few years. Even though its historical margin was healthy, shareholders will want to see Chegg become more profitable in the future. Its EBITDA margin for the trailing 12 months was 20.3%.
3. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Chegg, its EPS declined by 54.2% annually over the last three years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
Final Judgment
We see the value of companies helping consumers, but in the case of Chegg, we’re out. With its shares lagging the market recently, the stock trades at 3.4× forward EV/EBITDA (or $0.96 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
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