Hyper-growth digital education company Chegg (NYSE:CHGG) recently announced an April data breach that exposed information on 40 million of the company’s users. In the wake of the news, CHGG stock traded down more than 10%.
This a dip investors should consider buying.
As data breaches go — think Target (NYSE:TGT) or Verizon (NYSE:VZ) — Chegg’s April hack is a non-event. No valuable information was compromised, and Chegg’s underlying demographic won’t care all that much. The technicals point to a big bounce-back in the near-term. The fundamentals point to continued success for CHGG stock in the long-term.
Overall, CHGG stock is a secular growth winner, and the recent data-breach sell-off is a golden opportunity buy a secular winner at a big discount. Investors should take advantage.
No Good Breaches…
Given the information available, the April Chegg data breach doesn’t look all that serious.
To be sure, no data breach is good. But, as far as hacks go, this one isn’t all that bad. According to a company SEC filing, the only information compromised in the April event were Chegg usernames, email addresses, shipping addresses, and passwords. Importantly, valuable and financial information like Social Security numbers and payment info was not effected.
Want some idea of the effect of breaches on stock price? Consider Equifax (NYSE:EFX), which had a huge data breach last year that involved much, much more sensitive information. That company has been largely unaffected since, and EFX stock has bounced back to pre-hack levels. Same thing should happen with CHGG stock, but much more quickly.
Moreover, the demographics of Chegg’s users imply that there won’t be much, if any, fallout from this breach. Chegg is a digital education platform aimed at high school and college students. That demographic was raised in the digital information era, and is used to not having privacy online. Moreover, they are more understanding of hacks and data breaches than their older peers. Consequently, most of Chegg’s users won’t care, and some of them will be so busy studying that they won’t know anything happened.
While the market is treating it as a big event, it’s not As such, investors would be wise to take advantage of this disconnect, and buy the dip in CHGG stock.
Long-Term Winner With Near-Term Buying Opportunity
CHGG stock is a long-term winner. Over the past year, the CHGG stock price nearly doubled; In the last three years, it’s tripled.
During that stretch, CHGG stock hasn’t been subject to many big drops. This stock started its true uptrend in August 2016, when the stock price crossed above the 200-day moving average. Since then, CHGG stock has been subject to three near-15% sell-offs. Each time, those sell-offs were extremely brief, and the stock bounced back within days.
Right now, CHGG stock is 13% off recent highs. Thus, the stock is in familiar territory. Each time this sort of sharp drop has happened over the past two-plus years, CHGG stock has rebounded strongly. I expect the same thing to happen this time around. Why? The fundamentals remain strong.
The Long-Term Fundamentals Remain Strong
Nothing about this data-breach changes Chegg’s long-term fundamentals, which are among the most attractive fundamentals in the market.
During the past two years, the student-first education company has pivoted from renting out textbooks and study materials, to running a connected learning platform with high-margin software revenues. In so doing, the company made itself a long-term winner. Chegg is providing services that high school and college students across America need. Competition is next to nothing. Brand awareness is high. Margins are high. The addressable market is big. Growth is big.
Those strong fundamentals are here to stay for a lot longer. There are 36 million high school and college students in America. All 36 million could benefit from using Chegg as their connected learning platform. Today, though, Chegg only has 2.2 million subscribers.
So, Chegg is tapping into only about 6% of its total addressable market in the U.S. With little competition, brand awareness for Chegg is sky-high (the brand’s unaided awareness among college students is second to none, above even Amazon (NASDAQ:AMZN)). Absent meaningful competition and with high brand awareness, Chegg’s path to controlling 50% or more of this market in the next 5-10 years has a ton of clarity. That would imply 18 million subs, a near nine-fold increase from current levels, and this doesn’t even include potential international growth.
Bottom Line on CHGG Stock
Overall, the Chegg growth narrative is far from being over, meaning investors should expect CHGG stock will remain in an uptrend for the foreseeable future, and this recent sell-off is a dip worth buying.
CHGG stock is a long-term winner due to its leadership position in the digital education services space. The April data breach is a non-event. But, the market is treating it as a big event. As such, this sell-off is an opportunity for investors to buy a secular winner at a big discount.
As of this writing, Luke Lango was long CHGG and AMZN.
