Artificial intelligence (AI) has been making waves, and has helped catapult stocks like Nvidia (NVDA) into the ranks of $2 trillion companies - but at the same time, other companies have seen their business models take a hit from the rapid adoption of generative AI and ChatGPT. This includes online education companies that are witnessing an exodus of students who are instead pivoting to ChatGPT.
Specifically, Chegg (CHGG) is down 36.7% YTD, and is trading near its record lows. Some of the company’s woes are similar to former “stay-at-home” winners like Zoom Video Communications (ZM) and Teladoc Health (TDOC). The revenues of these companies surged during the pandemic-era lockdowns, but their growth has since fallen considerably - and in some cases, turned negative.
ChatGPT Has Been a Challenge for Chegg
While AI has featured prominently during the earnings call of companies over the last year, Chegg has been quite candid about how competition from ChatGPT has been a challenge for its business. That said, Chegg has also pivoted to AI, and believes it is now becoming a tailwind rather than a headwind.
Is CHGG stock a buy near record lows as it takes on the likes of ChatGPT and Gemini? We’ll discuss in this article.
Chegg’s Revenues Have Been Falling
Chegg’s annual revenues peaked at $776 million in 2021 before dropping 1.2% in 2022 and 6.6% last year. The company’s guidance implies a 15% YoY fall in its Q1 2024 revenues - and while it hasn’t provided annual guidance, analysts expect its revenues to fall 4.3% in 2024. Chegg’s subscriber count has also been declining, and the metric dipped 6% to 7.7 million last year.
One bright area for Chegg continues to be its strong cash flows and healthy balance sheet. Last year, the company generated free cash flows of $173 million on adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) of $222 million. It had cash and cash equivalents worth $580 on its balance sheet with a net debt of only $20 million at the end of 2023.
I would, however, take that impressive free cash flow generation with a grain of salt, as Chegg reported share-based compensation of $133 million last year.
How Does Chegg Plan to Return to Growth?
During their Q4 earnings call, Chegg’s management listed four priorities for 2024. These include:
- Working on new account growth
- Continuing to deliver strong margins and cash flows
- Enhancing its AI capabilities
- Leveraging its Skills platform
To revive its growth, Chegg is offering promotional pricing, hoping to convert the pipeline into long-term loyal customers. It was quite upbeat on its AI capabilities, and said it is moving away from human answers. Automating answers should help Chegg lower the cost of serving customers.
The company stressed that, through automated answers, it can offer solutions to a lot more students - which also increases the flywheel by enhancing its search engine optimization (SEO), as more answers get indexed into search engines.
How Can Chegg Take on ChatGPT?
After flagging the threat from ChatGPT last year, Chegg was relatively upbeat during the Q4 earnings call, which CEO Daniel Rosensweig said, “turned out is less of a competitor than we were concerned with.”
He added, “that is because they give an illusion of accuracy, but it's not accurate and students cannot afford to have inaccurate, incorrect information. Plus they don't go there to learn, they actually come to Chegg to learn.”
He also emphasized that as Chegg enhances its AI capabilities, AI will become a tailwind rather than a headwind.
CHGG Stock Forecast
Wall Street analysts, however, don’t buy into that optimism. Of the 14 brokerages covering CHGG stock, only 1 has rated it as a “Strong Buy,” while 10 say it's a “Hold.” One analyst rates the stock as a “Moderate Sell,” and 2 deem it a “Strong Sell.”
Chegg’s mean target price of $9.94 is 38% higher than yesterday’s closing price, and it's trading only marginally higher than the Street-low target price of $7.
Should You Buy Chegg Stock Now?
While Chegg faces multiple headwinds - including falling revenues and subscribers, competition from ChatGPT, and weak macros - the valuations look quite cheap here. CHGG stock trades at a next 12-month (NTM) enterprise value-to-EBITDA of 5.4x, which looks quite attractive.
That said, the company needs to revert to growth - and while it is hopeful of doing so, it did not provide any timeline. Overall, given the reasonable valuations, I wouldn’t yet give up on CHGG stock in its “David versus Goliath” battle with ChatGPT.
On the date of publication, Mohit Oberoi had a position in: CHGG , TDOC , NVDA . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
