Chegg (CHGG) investors are bound to be disappointed with the stock’s roughly 84% YTD fall, which places it among the worst-performing Russell 2000 Index (RUT) stocks this year. Chegg stock just keeps getting cheaper, and has been falling to new lows this month. In this article, we’ll look at Chegg’s 2025 forecast and analyze whether the stock will keep falling to new lows, or if it CHGG can recover from its troughs. Let’s begin by looking at why Chegg stock has been falling.
Why Does Chegg Stock Keep Falling to New Lows?
The COVID-19 lockdowns helped to drive revenues of companies like Zoom Video Communications (ZM), Teladoc Health (TDOC), and Chegg. However, the entire group has since crashed - and to put it bluntly, their services now no longer appear as “critical” and irreplaceable as they were during the lockdowns.
All of the former pandemic darlings are either growing at a slow pace or worse, contracting. However, Chegg’s woes are much deeper than many of the other former “stay-at-home” companies, and it's facing a tough challenge from artificial intelligence (AI) companies like ChatGPT.
Chegg’s revenues have fallen YoY for nine consecutive quarters and the slowdown has only worsened. Its revenue fell by double digits in Q2, even as the decline was better than what the company forecasted. Its Q3 guidance implies a YoY fall of over 15%, which is even wider than the 10.8% that it witnessed in Q2.
With Chegg’s revenues falling so rapidly, it's not surprising that the stock has also been in a freefall. However, the question that needs to be asked is - has the stock fallen a bit too hard, and is the risk-reward now favorable, despite Chegg’s woes?
Chegg’s Valuations Are Quite Depressed
Chegg trades at a next 12-month (NTM) price-to-earnings (P/E) multiple of a mere 2.22x, while the market cap to free cash flow multiple is below 2. While value investors might ordinarily pounce on a stock with such low valuations – especially if it is a company with negative net debt (more cash than debt) on its balance sheet – CHGG's valuations are low for a reason.
Chegg’s revenue decline is not expected to improve anytime soon, and analysts expect its revenues to fall by 5.8% in 2025. While it's not exactly a rosy forecast, that would still be a lot better than the 11.7% YoY revenue decline that Chegg is expected to post this year.
Chegg Stock 2025 Forecast
Chegg elevated its chief operating officer Nathan Schultz to the position of CEO in April. Schultz was leading the company’s AI efforts, whose success will eventually determine the company’s future as it battles competition from the likes of ChatGPT, which is eating into Chegg’s membership numbers, and by extension its revenues and profits.
Chegg has set itself a target of achieving adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) margin of over 30% with at least $100 million in free cash flows. The company's current market cap is under $200 million, so the kind of free cash flows it is targeting could potentially enable it to repurchase half of its shares. That said, Chegg has already been spending generously on repurchases, but these haven’t yet stemmed the slide in its stock price, with CHGG touching a new low of $1.78 on Sept. 10.
Analysts Rate CHGG as a Hold, but See Massive Upside
Of the 14 analysts covering Chegg, 12 rate it as a “Hold,” while one each rates it as a “Moderate Sell” and “Strong Sell.” However, the stock’s mean target price of $3.91 is over twice the current price levels, and Chegg even trades below its Street-low target price of $2.
In July, Morgan Stanley upgraded Chegg from “underweight” to “equal weight,” even as analyst Josh Baer cut Chegg’s earnings estimates and trimmed his target price by half to $3.25. Morgan Stanley’s investment thesis was also based on the company’s low valuations and the resultant “balanced risk/reward.”
Will Chegg Go the Way of Kodak?
Given the existential threat that Chegg faces from AI companies, a section of the market worries that the edtech company might fade from relevance in the same manner as Eastman Kodak (KODK), which failed to evolve. To be sure, Chegg has also pivoted to AI - but the challenge remains to get more people to pay for its services and lure them away from platforms like ChatGPT.
GenAI platforms are far from perfect and often provide incorrect answers, whereas Chegg believes it can do better. The company is also expanding internationally and providing localized experiences. However, international pricing is much lower than what Chegg charges in the U.S., so its average revenue per user (ARPU) might come down as it adds more international users. Even within the U.S., the company might need to do more promotions to increase its user base.
All of that said, I find Chegg’s risk-reward to be favorable at these prices. Given the low valuations and expectations of a more stable revenue environment in 2025, the stock could bounce back next year, even as it remains a high-risk proposition.
On the date of publication, Mohit Oberoi had a position in: CHGG , TDOC . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
