Chegg: Still Too Early To Make This 'AI Victim' A Bottom-Fisher's Buy

seekingalpha11-19

Chegg has fallen by 98.5% due to the rise of ChatGPT and other factors, but contrarian investors may find CHGG's super-low current valuation makes worthy of consideration.Yet while the online learning...

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overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nChegg: Still Too Early To Make This 'AI Victim' A Bottom-Fisher's Buy\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-11-19 21:18 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4738635-chegg-too-early-to-make-this-ai-victim-a-bottom-fisher-buy><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Chegg has fallen by 98.5% due to the rise of ChatGPT and other factors, but contrarian investors may find CHGG's super-low current valuation makes worthy of consideration.Yet while the online learning...</p>\n\n<a href=\"https://seekingalpha.com/article/4738635-chegg-too-early-to-make-this-ai-victim-a-bottom-fisher-buy\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4548","symbol_name":"巴美列捷福持仓","start_time":0,"source_url":"https://seekingalpha.com/article/4738635-chegg-too-early-to-make-this-ai-victim-a-bottom-fisher-buy","article_id":"2484428799","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1763326459/image_1763326459.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2484428799","pubTimestamp":1732022329,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Chegg has fallen by 98.5% due to the rise of ChatGPT and other factors, but contrarian investors may find CHGG's super-low current valuation makes worthy of consideration.Yet while the online learning","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4548":"巴美列捷福持仓","BK4204":"教育服务","CHGG":"Chegg Inc"},"translate_title":"Chegg：现在让这个“人工智能受害者”成为底线还为时过早——费舍尔的买入","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"CHGG":0.9},"content_text":"Chegg has fallen by 98.5% due to the rise of ChatGPT and other factors, but contrarian investors may find CHGG's super-low current valuation makes worthy of consideration.Yet while the online learning company has reinvented itself before, Chegg's current turnaround game plan may prove \"too little, too late,\" as GenAI technology poses an even larger threat.With this, CHGG may need to pursue a strategic alternative: acquire a publicly traded peer that's pivoting towards the institutional market.While some may be willing to buy under the guise that \"value is its own catalyst,\" I'm sticking to the sidelines, until any sort of \"silver bullet\" potential catalyst emerges.  Chegg (CHGG) Kenstocker/iStock via Getty Images  When it comes to online learning services provider Chegg (NYSE:CHGG), the phrase \"AI victim\" may be what first comes to mind. After all, you don't have to look far to see commentary about CHGG stock, a pandemic-era darling, falling 98.5% from its all-time high, due to the rise of generative artificial intelligence (GenAI) platforms like ChatGPT. However, while ChatGPT and related technology has indeed made a serious negative impact on the company's price performance, that hasn't stopped some investors from taking a contrarian view on the situation. This has been on full display as of late, based on post-earnings price support for CHGG. Yet while current and potential challenges may seem \"priced-in,\" keep in mind that a major potential catalyst will have to emerge before even a partial comeback becomes possible. As I'll explain below, this makes it questionable to buy Chegg today as a turnaround play, even as shares sport an extremely low valuation. CHGG Stock and its Closing Second Chapter Bearish investors who have declared \"Chegg is done for\" may want to bone up on their corporate history. It's not as if the rise of GenAI represents Chegg's first \"adapt or die\" moment. As many may recall, Chegg was not initially founded as an Edutech company. Rather, at its founding back in the 2000s, Chegg's main business was in the rental and resale of college textbooks. Capitalizing on high demand from cash-strapped students looking for a cheaper alternative to buying their required textbooks from the on-campus book store, Chegg experienced rapid growth during this time. However, within a few years, Chegg's textbook rental business matured, then became vulnerable to technological disruption and other trends outside the company's control. With the move to digital textbooks, coupled with falling print textbook pricing making its rental option less attractive to customers, Chegg embarked on what was its first major transformation, very much akin to Netflix's (NFLX) transformation from DVD rentals to streaming. That is, Chegg de-emphasized its textbook business, and gradually became primarily a provider of online educational services like homework help and tutoring. It took some time, but in the latter half of the 2010s, this transformation resulted in Chegg's revenues stabilizing, its operating margins going from negative to near-breakeven, and the CHGG stock pricing rising from the mid-single-digits in 2016, to just under $40 per share by decade's end. However, in hindsight, this slow-and-steady liftoff proved to be merely a prelude to CHGG's truly incredible run, during the Covid-19 pandemic. With lockdowns resulting in \"school from home\" for the vast majority of U.S. students, this \"new normal\" resulted in a massive jump in revenue, a swing to profitability, and yet another dramatic run-up in price for CHGG, as seen in the chart below: Data by YCharts Unfortunately, triple-digit price levels for CHGG proved to be short-lived; after climbing to as much as $113.51 per share in February 2021, this stock began what would end up being a multi-year downward descent back to \"penny stock territory\" (under $5 per share). While initially driven by worsening fiscal performance caused by factors like declining college enrollment and inflation, by late 2022, the time that ChatGPT and GenAI first entered the public lexicon, Chegg's second \"adapt or die\" moment commenced. What Chegg's Latest Results Suggest About a Much-Awaited 'Third Chapter' It wasn't as if Chegg were completely ignorant about the potential threat from rapid advances in artificial intelligence technology. However, as discussed in a June 2023 article published by Wired, Chegg's management completely underestimated how quickly this technology would begin to threaten its business. The consequences of this misstep soon became very clear, as students quickly figured out they could use ChatGPT as a free alternative to Chegg's paid subscription-based platform. In turn, by the time of the company's Q1 2023 earnings release, management was already conceding that this technology posed a serious threat to its business model, with shares falling nearly 50% on the news. Scrambling to counter this threat, Chegg started rolling out GenAI tools like CheggMate on its platform. Yet while in mid-2023 it seemed as though this response would be sufficient enough to mitigate declining subscriber numbers, this bullish sentiment proved short-lived. In the quarters that followed, CHGG stock continued its drop, as revenue declines continued, and profitability plummeted. Even during the preceding quarter, these trends have persisted, as seen with Chegg's Q3 earnings release on Nov. 12. Although revenue and earnings came in ahead of expectations, reported revenue was down 13.5% year-over-year. Non-GAAP earnings of 9 cents per share may have beat consensus by 2 cents per share, this positive was outweighed by gloomy updates to guidance. For Q4 2024, Chegg has guided for revenue of $141 million to $143 million, nearly $20 million below consensus, and for adjusted EBITDA of $32 million to $35 million, again far below analyst forecasts calling for adjusted EBITDA to come in at around $46 million. Making matters worse, management no longer anticipates the company hitting 2025 financial targets, such as $100 million in free cash flow. Still, while the stock experienced its latest (albeit relatively modest) tumble on this disheartening news, shares have bounced back off their latest all-time lows. Data by YCharts Perhaps, due to investors taking a second look at some of the positive aspects to the latest updates. Namely, Chegg's plans to reduce its headcount by 21%, as well as its plans to buy back as much as $300 million of its outstanding securities. Yet while some investors, more hopeful than before about future prospects, have dived back in, there is one major red flag that may suggest staying away: the lack of an identifiable \"third chapter.\" Without one, the CHGG stock rout could carry on, no matter how seemingly cheap shares have become. A Low Valuation Means Little as Uncertainty Runs High At present, price levels, Chegg has a market cap of around $179.4 million. Factor in $630.8 million in debt, and a $361.1 million cash position, and CHGG's enterprise value comes in at around $449.1 million. Based on TTM EBITDA of $88.8 million, shares trade at an EV/EBITDA ratio of around 5.1x. Furthermore, based on sell-side consensus for 2025, which calls for the company to generate around $147.2 million in EBITDA, this stock trades at a forward EV/EBITDA ratio of just less than 3.1x. On a price to earnings basis, CHGG looks even more attractive on a screener. Shares trade for 2.2x estimated 2024 earnings, and 2.5x estimated 2025. At such low multiples, in theory, all it may take for the stock to bounce back is simply for revenue and profitability to stabilize. After all, most other stocks in the educational services sector trade at multiples in the 10x-20x range. Even if the existential threat of ChatGPT still warrants a discounted valuation, multiple expansion to 2.5x to a multiple in the mid-to-high single digits would be tremendous price appreciation for shares. The problem, though, is that there is great uncertainty of this stabilization happening. Again, this is due to Chegg still figuring out what its \"third chapter\" will be. Yes, the edutech provider does have a game plan to improve fiscal performance. Back in June, Chegg announced a multifaceted restructuring plan, which includes both cost-cutting efforts, as well as changes to its product and marketing strategy. As CEO and President Nathan Schultz discussed on the Q3 2024 earnings conference call, better-than-expected results during the quarter suggest that the company is already starting to see positive results from these turnaround efforts. Not only that, with the latest announced round of layoffs, Chegg expects to further reduce operating costs by as much as $70 million next year. However, while all of this sounds like the start to further improvements, uncertainty still looms. The competitive threat from free and paid GenAI products is intensifying. In particular, Google's (GOOG) (GOOGL) rollout of AI overviews (or AIO) on its search results pages. As Schultz put it on the earnings conference call: It's our belief that the prevalence of AIO will only continue to increase and that Google in an attempt to maintain market share and shifting from being a search origination point to the destination, disintermediating content sites like Chegg. Schultz cited this, and the resultant drying up in Chegg's non-subscriber customer traffic, as key reasons behind the company's walking back of its prior 2025 guidance. Even as Chegg is working to differentiate its product, with a focus on quality and longer-term improvements in student performance, this means little for much of its customer base, which subscribed for fast and easy homework help. That's not all. As Seeking Alpha contributor Jordan Montgomery discussed in his bearish write-up on CHGG stock last April, what differentiates Chegg from GenAI substitutes is its \"ability to provide quality, human, answers to study questions.\" However, with Chegg ramping up cost-cutting efforts, this could come at the cost of the \"human factor,\" calling into question the value in subscribing to the site, in lieu of using free alternatives like ChatGPT. In short, the key risk to wagering on a Chegg comeback stems from the fact that the company has yet to establish what its \"third chapter\" will be. While there's one possible route out there that may lead to a viable path forward, only time will tell if the company will wholeheartedly pursue such change. A Possible 'Third Chapter' for Chegg It should be noted that Chegg's plans to buy back up to $300 million in securities has more to do with the company's high debt position than it does with possible efforts to boost the share price through the repurchase of common stock. That is, per the company's latest 10-Q filing, Chegg's outstanding debt, almost entirely consisting of convertible securities, is soon coming due. $358.2 million worth of convertible debt matures in 2025, with $243.2 million maturing in 2026. Buying back a large chunk of its debt, rather than rolling it over via a refinancing, means a lower likelihood that increased borrowing costs/financing difficulties exacerbate an already challenging situation. Nevertheless, besides de-leveraging the balance sheet, I believe that Chegg should also consider using its cash position to make an acquisition that could help the company write its \"third chapter.\" That would be an acquisition of Nerdy (NRDY), which is the parent company of online tutoring services provider Varsity Tutors. As you may recall, I laid out the bull case for NRDY back in September. In a nutshell, I argued that the Nerdy's new focus on becoming an institutional-focused provider of tutoring services, with school systems rather than fickle customers paying for Nerdy's services, could translate into tremendous improvement in the company's fiscal performance. Although Chegg discussed plans to pursue the institutional market in its June restructuring announcement, acquiring Nerdy would provide a turnkey way to pursue this opportunity. There would also likely be the potential for Chegg to eke out cost synergies from buying Nerdy and integrating it into its existing operations. Nerdy's recent fiscal results, along with a post-earnings downgrade from analysts at JPMorgan, highlight execution risks with its plans, but I can envision a scenario where Chegg could invest cash flow from its dwindling customer-facing business to fund the scaling up of Varsity's institutional business. Admittedly, even with a market cap of $180.4 million, and an enterprise value of around $75 million, a full-on cash buyout of Nerdy by Chegg could be too big to swallow. However, a cash and stock deal could prove beneficial long-term for shareholders of both companies, with the combined entity surviving the disruption of GenAI, successfully transitioning to a more sustainable institutional-based business model. Bottom Line on Chegg Stock With my \"third chapter\" thesis for now food for thought, and likely not an alternative that Chegg is currently pursuing, I wouldn't buy the stock simply on the possibility this scenario plays out. Nor would I buy CHGG today, just on the basis that it's cheap, and that any sort of positive strategic announcement would likely drive shares to higher prices. It's unclear whether such a \"silver bullet\" will arrive in the immediate future, although I wouldn't rule out the potential for a shareholder activist to show up on the scene. For now, it may be best to assume that Chegg's current game plan, multifaceted on paper but in practice focused largely on cost-cutting, will prove \"too little, too late\" to outweigh the disruption caused by generative AI products. That's not to say that CHGG will keep sinking towards zero, but as it stands now, at best shares could languish at current prices, as hopes that a viable turnaround plan emerges help to provide support. At worst, the impact of Google's AIO and other GenAI innovations could mean Chegg's fiscal performance deteriorates to an even greater extent than suggested by management on the latest conference call. If profitability keeps dropping despite cost-cutting, there may even be growing concerns that Chegg will be unable to pare down and/or refinance all the outstanding debt that's maturing over the next two years.  With all of this in mind, while one is free to enter/maintain a Chegg position, on the view that \"value is its own catalyst,\" I'm willing to wait for a potentially game-changing catalyst to finally up, before buying CHGG stock.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2484428799"}