**TL;DR:** With a sales multiple of 2, Chegg is priced like the company is going out of business soon, but the company’s financial situation makes this seem unlikely. They have cash on hand and are ready to plug away at their position and have made strategic partnerships with AI companies to enhance their business amidst technological changes. The stock is clearly undervalued and I currently have a price target of $5.
Background Information:
Chegg is a subscription service for students to help them with their homework and study. Subscribers have access to curated answers to homework problems and other study materials. This company once had a market cap of 12 billion in 2021 and has been beaten down to a market cap of 170 million as of 10/23/2024.
Macroeconomic factors:
The main factor bringing this stock down is the rise of AI and widely available LLMs. This investment thesis has dominated the sentiment around this stock, as Chegg has regressed a little bit in their subscription revenue (down 11% YOY) and laid off about 20% of their staff.
https://preview.redd.it/2s567mr0tixd1.png?width=554&format=png&auto=webp&s=030c183698ac104d84a8a47ff09474c8055a9a0d
Despite all of this, Chegg as a company has taken this on the chin. They have an existing partnership with OpenAI and their language education division (Busuu) has recently announced they are using AI in their service to simulate real conversations in other languages. Chegg is not backing down but attempting to evolve in the changing marketplace.
Anecdotally, I know many people that still use Chegg in college and know of fraternities that buy Chegg subscriptions for their members. With Chegg’s earnings coming up, even the smallest sign of life is due to send the stock soaring.
Financial Statement Analysis:
When I saw this stock’s history, I assumed their financial statements must be an absolute mess. However, Chegg is actually in a decent financial situation. Chegg has $340 million more in assets than liabilities. Their revenue is approximately $100 million a year, meaning hypothetically, as an extreme example, if Chegg were to use all of its revenue for buybacks, they could buyback half of the shares outstanding at their current valuation. I was initially shocked when I saw they had lost $600 million in the last 12 months in assets, until I realized this was because the company has written off almost $600 million in goodwill, which is maybe the best-case scenario for a huge loss like. I am not super worried about that. Chegg is currently holding $133 million in cash. Their current ratio is 0.9. To be sure, their adjusted EBITDA is down 27%, but part of this is due to a decrease in share-based compensation which I believe is a good thing.
https://preview.redd.it/kfd75uq5tixd1.png?width=624&format=png&auto=webp&s=7068183088c24e85546d103c4b13253f2ad18535
Financial Metrics:
This is where things start to get really attractive. Chegg is trading at a 2x multiple sales multiple. Their forward P/E is 1.7 and EV/EBITDA is 3. Chegg is clearly priced as if they are going to go out of business very soon, which is absurd given their position on their balance sheet. Sure, they're not in the best position possible, and the stock definitely deserves to be beaten down from their al-time high, but their current valuation is dirt cheap. Selling ice to Eskimos kind of cheap, which absurd given their ability to pivot. This is clearly an overreaction to the hype of AI and their small decline in revenue compared to their decline in valuation
Short Interest:
Currently 14% of the float and 11% of the shares outstanding are being shorted. This, I believe, is the main reason why there is such a huge discrepancy between the company’s market valuation and true performance.
My Positions:
For full transparency, I own about 5.5k shares, 50x Jan 17 2025 $4 Calls, and 15x Dec 19 2025 $5 Calls.
https://preview.redd.it/u5cviojatixd1.png?width=792&format=png&auto=webp&s=eacced982ac26785494f34a54b928c1d9a8c7e86