What a fantastic six months it’s been for Chegg. Shares of the company have skyrocketed 186%, hitting $1.44. This performance may have investors wondering how to approach the situation.
Is now the time to buy Chegg, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free for active Edge members.
Why Do We Think Chegg Will Underperform?
We’re happy investors have made money, but we're cautious about Chegg. Here are three reasons why CHGG doesn't excite us and a 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 17.3% annually to 2.62 million in the latest quarter. 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
Investors regularly analyze operating income to understand a company’s profitability. Similarly, EBITDA is a common profitability metric for consumer internet companies because it excludes various one-time or non-cash expenses, offering a better perspective of the business’s profit potential.
Looking at the trend in its profitability, Chegg’s EBITDA margin decreased by 12.8 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. EPS Trending Down
We track the change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Chegg, its EPS declined by 38.2% 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. Following the recent surge, the stock trades at 2.4× forward EV/EBITDA (or $1.44 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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