Chegg: Should You Catch This Falling Knife? Analyst Weighs In

 Chegg: Should You Catch This Falling Knife? Analyst Weighs In

It might be wise for Chegg (CHGG) investors to refrain from looking at Tuesday’s trading activity. Shares are tumbling ~50% after the company’s Q3 results missed the targets on several metrics.

On the plus side, non-GAAP EPS of $0.20 just edged head of the Street’s call by $0.01. However, while revenue increased by 11.6% year-over-year to $171.94 million, it came in $1.88 million shy of the consensus estimate. The Subscriber count also dropped; from 4.86 million in the prior quarter to 4.4 million. The Street modeled 4.85 million subs.

However, the real disappointment was reserved for Q4’s outlook; the education technology company is expecting revenue between $194 and $196 million, a way off Wall Street’s forecast of $240.6 million. The company also reduced its 2021 full-year guidance to $763 million, 6% below the guidance provided with Q2’s results. If that wasn’t bad enough, the company has delayed issuing 2022’s guidance until February 2022.

Berenberg analyst Phillip Leytes says this reflects “uncertainty around timing associated with the difficult macroeconomic environment.”

Chegg pointed to a big drop in US and Canadian traffic with students enrolling for fewer classes. A tight labor market and mental fatigue were noted as factors which contributed to waning enrollment rates at undergraduate universities.

On a more positive note, the company’s strong performance outside of North America “surprised” the analyst. Chegg surpassed its 1 million-plus 2021 international subscriber objective; Leytes sees the “robust growth” continuing into 2022.

However, adding to current woes, the company is also being sued by textbook publisher Pearson, alleging copyright infringement. “Based on opinions from legal experts,” Says Leytes, “the case is difficult to predict and could swing either way.

With all the above as backdrop, don’t expect the stock to exhibit a turnaround any time soon. “Ultimately,” Leytes summed up, “We believe the challenging (and unpredictable) macroeconomic/industry environment and Pearson lawsuit will continue to weigh on share prices over the near term.”

That said, unlike some of Leytes’ peers, the analyst hasn’t downgraded Chegg’s rating; the Buy recommendation remains while the $98 price target stays put too. Following Tuesday’s meltdown, there’s upside of a huge 195% from current levels.

Several analysts have been readjusting their CHGG models following the disappointing print and currently, based on 7 Buys vs. 8 Holds, the stock has a Moderate Buy consensus rating. The sharp price drop could potentially present an opportunity; going by the $68.27 average price target, shares could climb ~105% higher over the 12-month timeframe. (See CHGG stock analysis on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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