Electronic learning (E-learning) refers to learning and/or training with the usage of electronic devices such as computers and other devices. With the onset of the COVID-19 pandemic, the e-learning industry has experienced an exponential rise due to the closure of schools and universities worldwide.
According to Facts & Factors, the global e-learning market size is anticipated to reach $374.3 billion, growing at a CAGR of 14.6% between 2020 and 2026. Consequently, companies that offer online education services should benefit in the long term.
In today’s article, I am going to analyze and compare two education & training services stocks, Chegg, Inc. (CHGG) and 2U, Inc. (TWOU), to determine which one currently presents a better buying opportunity.
Based in Santa Clara, California, Chegg operates a direct-to-student learning platform that supports students through different solutions, including Chegg Services, Chegg Study, Chegg Writing, and others. Founded in 2008, 2U, Inc. is a Maryland-based company that offers online education services. The company operates through two business segments: Degree Program and Alternative Credential.
Year-to-Date (YTD), CHGG stock is down 8%, while shares of TWOU have plunged about 52%.
Recent Developments
On January 13th, Piper Sandler analyst Arvind Ramnani upgraded Chegg to "Overweight" from "Neutral." The analyst noted that the shares look more attractive after some sector-wide sell-off. In addition, Ramnani believes that the company's core growth levers remain intact while it is still trading below pre-pandemic levels. However, the firm decreased its price target on CHGG to $43 from $54.
On February 15th, William Blair analyst Stephen Sheldon downgraded 2U to "Market Perform" from "Outperform." The analyst said TWOU's disappointing 2022 guidance could keep the stock range-bound. The company has experienced a series of downgrades from other analysts as well.
Recent Quarterly Performance & Analysts’ Estimates
Chegg's total revenues for its fourth quarter of 2021 remained flat on a year-over-year basis, rising by only 1% YoY to $207.5 million. However, the company topped Wall Street revenue estimates by $12.3 million. The lion's share of CHGG's revenue is made up of Chegg Services. In Q4, Chegg Services segment revenue has been reported 6% higher YoY at $187.2 million due to lower account sharing, increased global awareness, and penetration. Additionally, CHGG disclosed a Non-GAAP Q4 EPS of $0.38, beating analysts' consensus by $0.07.
However, the company’s Adjusted EBITDA came in at $78 million compared to $87.87 million as of Q4 2020.
For the next quarter, analysts project CHGG's EPS to be $0.24, down 13.11% year-over-year. In addition, analysts expect that its FQ1 revenues should rise by 2.38% to $203.10 million.
2U, Inc has recently revealed earnings for its fourth quarter of 2021, and although the company surpassed Wall Street consensus, its shares have slid by over 50% on 2022 guidance disappointment. In Q4, the company’s total revenue grew 13.1% year-over-year to $243.6 million, slightly beating Wall Street's consensus by $0.6 million. Its degree program segment revenue grew 17% YoY to $152.4 million, while alternative credential segment revenue advanced 8% YoY to $91.2 million. Besides, 2U reported a Non-GAAP EPS of ($0.20), beating analysts' consensus by $0.05.
When it comes to TWOU's guidance, the company sees its FY2022 revenue and net loss in the range of $1.05-1.09 billion and $235-215 million, respectively. Its Adjusted EBITDA is expected to be $70-90 million, indicating 20% growth at the midpoint.
Currently, Wall Street expects TWOU's EPS to decrease 98.14% year-over-year in FQ1 to ($0.24). However, analysts see its fourth-quarter revenue at $253 million, indicating an 8.83% year-over-year increase.
Comparing Options Market Sentiment
Looking at the July 15th, 2022, option chain for both CHGG and TWOU, we can define options market sentiment by analyzing the calls/puts ratio. In CHGG's instance, the open calls/open puts ratio at the $30.00 strike price comes in at 2.17x, implying a bullish options market sentiment. When it comes to TWOU, the open calls/open puts ratio at the $10.00 strike price is 0.24x, showing a heavy bearish market sentiment.
Conclusion
While Chegg and 2U should benefit from the e-learning industry’s growth in the long term, I believe Chegg appears to be a better investment based on its superior financials, better growth prospects, and favorable options market sentiment.
CHGG shares were trading at $28.64 per share on Tuesday morning, up $0.35 (+1.24%). Year-to-date, CHGG has declined -6.71%, versus a -8.47% rise in the benchmark S&P 500 index during the same period.
About the Author: Oleksandr Pylypenko
Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist.
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