Down 70% in the Past Year, is Now a Good Time to Scoop Up Shares of Chegg?

Chegg, Inc. (CHGG) in Santa Clara, Calif., offers a direct-to-student learning platform that assists students on their path from high school through college. The company recently launched "Learn with Chegg," a new offering in its industry-leading platform that delivers notably higher personalization, automatically providing relevant information to its customers to create a personalized learning experience based on their requirements.

However, the stock is down 71.1% in price over the past year and 62.7% over the past nine months to close its last trading session at $30.73. 

In addition, with the company currently battling a lawsuit related to allegations that it failed to disclose materially adverse details concerning its business, operations, and prospects, its near-term prospects look bleak.

Here is what could shape CHGG's performance in the near term:

Ongoing Lawsuit

A securities class action lawsuit has been filed on behalf of investors who purchased CHGG stocks, claiming violations of the Securities Exchange Act of 1934. The complaint alleges that the company's increase in subscribers, growth and revenue was a temporary effect of the COVID-19 pandemic, which resulted in remote education for most U.S. students, and once the pandemic-related restrictions were lifted and students returned to campuses across the country, its extraordinary growth trends would end. As a result, CHGG's present business performance and financial prospects were not as robust as the market had been led to believe.

Stretched Valuations

In terms of forward non-GAAP P/E, the stock is currently trading at 26.01x, which is 92.2% higher than the 13.53 industry average. Also, its 5.16x trailing-12-months EV/Sales multiple is 291.94% higher than the 1.32x industry average.  Furthermore, CHGG's forward 4.99x Price/Sales  is 359.8% higher than the 1.09x industry average.

Inadequate Financials

CHGG's net revenue increased marginally year-over-year to $207.47 million for the fourth quarter, ended Dec.31, 2021. However, its operating expenses grew 26.4% from the prior-year quarter to $12.56 million. And its operating income declined 46.8% from its  year-ago value to $26.19 million. The company's net income fell 6.7% from its year-ago value to $24.31 million, while its EPS narrowed 16.7% year-over-year to $0.15.

POWR Ratings Reflect Uncertainty

CHGG has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. CHGG has a D grade for Value and a C for Quality. The company's higher-than-industry valuations are in sync with the Value grade. In addition, the company's weak financials are consistent with the Quality grade.

Among the 77 stocks in the F-rated Internet industry, CHGG is ranked #53.

Beyond what I have stated above, you can view CHGG ratings for Growth, Stability, Sentiment, and Momentum here.

Bottom Line

CHGG's shares have dipped more than 70% in price over the past three months, and the stock is currently trading 73.3% below its 52-week high of $115.21, which it hit on Feb.16, 2021. In addition, analysts expect its EPS to decline 14.3% in the current quarter (ending March 2022). So, given an ongoing lawsuit and the company’s unstable financials, we think the stock is best avoided now.

How Does Chegg Inc. (CHGG) Stack Up Against its Peers?

While CHGG has an overall D rating, one might want to consider its industry peers, Travelzoo (TZOO) and trivago N.V. (TRVG), which have an overall A (Strong Buy) rating.

CHGG shares fell $0.51 (-1.66%) in premarket trading Monday. Year-to-date, CHGG has gained 0.10%, versus a -7.26% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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