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Bull of the Day: Chegg, Inc. (CHGG)

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Chegg’s (CHGG - Free Report) phenomenal run over the last three years has seen the e-commerce focused textbook firm climb from roughly $5 a share to over $40. The company is coming off a stronger-than-projected second quarter and its business model, which as expanded, appears strong as students look to save amid rising college tuition.

Chegg’s Pitch

College debt has become a hot topic over the last several years, and some current presidential candidates have offered up various solutions to the problem. But beyond the politics of it all, the facts are startling. College tuition has skyrocketed nearly 1,400% since the late 1970s, which is four times the rate of U.S. inflation. College borrowers now owe over $1.5 trillion in student loans, with more than two million having defaulted in just the past six years.

With the current situation in mind, it seems clear why college students would look for every opportunity to save on everything they can. Textbooks are notoriously overpriced, especially when they are only used for a quarter or a semester. This is where Chegg comes in. At its core, the company’s most basic sales pitch is simple: “Saving broke students one textbook at a time - Save up to 90% on textbooks.”

The Santa Clara, California-headquarter firm allows people to buy, rent, and sell textbooks online. Students can also buy and rent e-books. Plus, Chegg offers study help, tutors, and test prep on everything from math to writing. The firm now runs an online internship search platform and other tools that aim to help college students find jobs.

Price Movement

As we mentioned at the top, CHGG shares have skyrocketed over the last three years, with the company up over 550%, compared to the Computer Software-Services Market's 43% climb and the S&P 500’s 34% jump. Chegg stock is also up nearly 200% in the past 24 months and 53% in 2019. Shares of Chegg currently hover at around $43.50.

 

 

Outlook & Earnings Trends

Last quarter, Chegg’s revenue jumped 26% from the prior-year period to reach $93.9 million. The company also saw its services subscribers climb 30% to 2.2 million, with total study content views up 25% to 198 million.

Looking ahead, our current Zacks Consensus Estimates call for the company’s third-quarter 2019 revenue to surge 20.4% to $89.38 million. Meanwhile, fourth quarter sales are projected jump 25.5% to $120.1 million.

Overall 2019 revenue is expected to climb roughly 25% to reach $400.72 million. Peeking further down the road, Chegg’s fiscal 2020 revenue is projected to pop 19.4% above our current year estimate to hit $478.3 million.

At the bottom end of the income statement, CHGG’s adjusted Q3 earnings are projected to soar nearly 43% to $0.10 a share. On top of that, full-year 2019 earnings are expected to climb 42% to $0.78 per share. Then, in 2020, Chegg’s earnings are projected to reach $0.91 a share, which would represent roughly 17% expansion above our current year estimate.

Chegg also boats an impressive history of quarterly earnings beats. The firm posted adjusted Q2 EPS of $0.23, which crushed our $0.15 a share estimate. This positivity helped boost the firm’s average EPS surprise over the trailing four period to 58%.

Better yet, we can see just how positive Chegg’s earnings estimate revision activity has turned since it reported its Q2 results. Investors should take special note of the impressive jumps for fiscal 2019 and 2020.

 

 

Bottom Line

The company operates a relatively simple, yet somewhat unique business model, and has managed to thrive even as Amazon (AMZN - Free Report) slowly eats away at more retail market share. Chegg’s solid earnings revisions trends help the company earn a Zacks Rank #1 (Strong Buy) at the moment. CHGG also boast a “B” grade for Growth in our Style Scores system.

Some of Chegg’s valuations metrics are stretched, which makes since given its stellar run. With that said, CHGG stock certainly appears worth considering at the moment as a growth play.

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