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Chegg: A Big Test for the IPO Market

Can an online textbook renter get a Wall Street following?


Textbook rental service Chegg wants to capitalize on the recent surge of interest in dot-coms with its own IPO.

But the deal will be more than just a gauge of interest in Chegg — it’ll be a big test of the market’s willingness to take on heavy risks.

Chegg, which was founded in 2005, actually approached its business similarly to Netlfix (NFLX), buying large volumes of textbooks and then renting them out to students. However, Chegg’s system eventually evolved toward a bigger focus on e-titles; currently, the company offers 180,000 physical titles and over 100,000 ebooks.

Chegg also offers Homework Help, which offers step-by-step assistance with problems found in thousands of textbooks. Plus, Chegg features services to assist high school students with finding the right college and obtaining scholarships.

All of these efforts have given Chegg a way to create a so-called “student graph,” which personalizes the user experience.

Chegg has put together a nice growth business, growing revenues from $148.9 million to $213.3 million from 2010 to 2012, though the company’s still losing money — $49 million for all of last year.

And expect the losses to continue. From Chegg’s S-1:

“We plan to continue to invest in the long-term growth of the company, particularly further investment in the technology that powers the Student Hub and the Student Graph and in the development of products and services that serve students.  As a result of our investment philosophy, we do not expect to be profitable on a generally accepted accounting principles in the United States, or U.S. GAAP, basis in the near term.”

Now, the market opportunity is enormous. On average, college students spend $1,200 annually for textbooks — up about 50% during the past decade.

Plus the sector has scorched of late. Just look at the price surges in companies such as Yelp (YELP), Groupon (GRPN) and Facebook (FB), not to mention the 54% returns in RetailMeNot (SALE) since its mid-July IPO.

But that might not be enough to get IPO investors excited.

Besides the heavy losses, Chegg also must deal with emerging competition from mega players including (AMZN), Apple (AAPL) and Google (GOOG).

At the same time, Chegg might not be able to pull off a smooth transition to ebooks. While the company is ramping up its available titles, consider that last year, 87% of revenues still came from print textbooks. The business is not only capital-intensive, but also poses lots of logistical issues.

Here’s one of the risk factors from the S-1:

“Publishers have significant flexibility in pricing eTextbooks due to their low production costs and may change their pricing strategies in the future, especially in light of increasing competition in the print textbook market and the rising costs of education. If the retail price of eTextbooks were to be significantly lower than print textbooks, consumers may purchase eTextbooks directly from the publisher or other retailers rather than use our print textbook or eTextbook services.”

Nonetheless, IPO investors have been bubbly lately, so they might very well get interested in a Chegg offering.

If they do, that would represent a huge turning point in the market, and likely would result in a parade of dot-com filings to follow.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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