Thanks mostly to the novel coronavirus pandemic, digital education giant Chegg (NYSE:CHGG) reported outstanding first-quarter numbers in early May as students pivoted in bulk towards online learning platforms. In response to the blowout earnings report, CHGG stock popped more than 30% to all time highs near $60.
Readers of mine know that I’ve been pounding the table about Chegg stock for several years. Back in mid-2018, I called the stock an “undiscovered long-term winner.” Throughout the Covid-19 March sell-off in markets, I said buy the dip in CHGG stock… over, and over, and over again.
From both mid-2018 and its March 2020 lows, CHGG stock has more than doubled.
And this may be just the beginning of the big rally.
It increasingly appears that Chegg is taking over the education world. That is, over the past few years, Chegg has created a strong but niche on-demand connected learning platform which some, but not many, high school and college students use. The data and trends today suggest that Chegg is in the first inning of taking that niche platform, and making it mainstream, on a global stage.
Over the next five years, Chegg will sustain robust user, revenue and profit growth on its way to becoming the digital standard across the global education market.
As all that happens, CHGG stock could power its way to $200.
Explosive Chegg Earnings
Chegg’s first-quarter earnings report was explosive.
As the coronavirus pandemic shut down schools across the country, high school and college students rushed to Chegg to both continue and enhance their at-home virtual learning experiences. Chegg Services subscriber growth, which was running at 33% in January and February, spiked in March to push the Q1 final sub growth rate up to 35%. This acceleration has continued in April, and management believes that Q2 sub growth will be greater than 45%.
For perspective, Chegg hasn’t reported 45%-plus sub growth since 2016, when the platform was about a third the size of what it is today.
Concurrent to robust sub growth, revenue growth hit a torrid pace, too. Q1 Services revenues rose 33% year-over-year (versus 31% growth in 2019), and Q2 Services revenues are expected to rise more than 45% — the best Services revenue growth rate since 2014. Meanwhile, overall revenues are expected to rise north of 45% in the second quarter, too. That would mark the best overall revenue growth rate since 2010 for Chegg.
Importantly, some of this uptick in Services growth is driven by Thinkful, the skill course platform Chegg bought in late 2019, which has seen tremendous engagement since the pandemic hit (as it has forced workers to learn new skills in hopes of getting a new job).
In other words, thanks to the coronavirus pandemic accelerating the need for virtual, on-demand learning services, the Chegg growth narrative is as hot today as it’s ever been.
Big Long-Term Growth Potential
Today’s growth spike is more than just a near-term phenomena.
The shift from physical, classroom-based learning, to digital, connected learning platforms was already happening before Covid-19. Chegg has been growing its subscriber base at a 30%-plus clip for the past six years. All the pandemic has done is accelerate this shift … to 45%-plus subscriber growth.
Of course, 45%-plus subscriber growth won’t last forever. But 20%-plus subscriber growth will last for the next five-plus years, for three big reasons.
First, the virtualization tailwind is finally gaining significant momentum in the academic world. Thanks to Covid-19, students and academic institutions across the world are pivoting towards online learning platforms. Those platforms have a lot to offer. Consequently, even once physical school resumes, many of those students and institutions will continue to use online learning tools as necessary supplements.
Second, Chegg is going global. For the longest time, Chegg has been a U.S.-focused growth narrative. In the first quarter and into the second quarter, though, Chegg saw explosive subscriber growth across the world. This early growth paves the way for word-of-mouth, student-to-student recommendations to drive huge international growth for Chegg over the next few years.
Third, Chegg is rapidly expanding its value proposition. This used to be just a textbook rental business. Then it became a textbook rental business and a homework solutions provider. Then it became a textbook rental business, a homework solutions provider, and an online tutoring hub. Now, Chegg is all of that, and offers test prep, writing help, a math solver, flashcards, expert Q&A, video tutorials, an internship finder, and a skill-based bootcamp with Thinkful, too.
Broadly, then, Chegg is turning into a virtualized student resource center on a global scale. The platform only had 4 million subscribers at the end of 2019. There are 54 million high school and college students in the company’s addressable markets.
Consequently, over the next several years, Chegg is going to grow by leaps and bounds.
Chegg Stock to $200?
Chegg’s earnings were so good that they illuminated a bull scenario wherein the stock jumps to $200 in the 2020s.
Here’s that bull scenario:
- Chegg leverages virtualization tailwinds, international expansion and its expanding value proposition to grow subscribers at a 20%-plus compounded annual growth rate to 30 million by 2030.
- Thanks to Thinkful (whose courses cost several thousand dollars), average revenue per subscriber rises at a steady low-single-digit pace into 2030.
- Big sub growth, mild unit revenue growth, and tepid declines in the required materials business lead to revenues rising at a 20%-plus compounded annual growth rate into 2030.
- Profit margins continued to expand with scale and higher average unit revenues. Adjusted operating margin hits 40% by 2030.
- Earnings per share soar from roughly $1 expected in 2020, to $10 by 2030.
Based on a 20-times forward earnings multiple — which is the medium-term average for technology stocks — that equates to a 2029 price target for CHGG stock of $200.
Bottom Line on CHGG stock
The latest earnings report underscored that the Chegg growth narrative is gaining tremendous momentum. Virtualization, international expansion, and value prop extension tailwinds are all coming together at the same time. These tailwinds will stick around for the next several years, too. As they do, this company’s connected learning platform will go from niche, to mainstream.
Chegg’s revenues, profits, and stock price will consequently all keep climbing higher. That’s why I’m not selling yet. CHGG stock has been, still is, and projects to remain a long-term winner.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long CHGG.