Chegg’s Guidance Could Imply the Entire Edtech Space Should be Avoided

Chegg, Inc. (NYSE: CHGG), a leading e-learning firm, reported 1Q 2022 earnings after the close of regular trading on May 2 which included a dour outlook for the remainder of 2022. The stock plummeted 30% on May 3, and the disappointing guidance may have made not only Chegg, but the entire online education sector, essentially uninvestable for at least the intermediate term.

Specifically, Chegg CEO Dan Rosensweig said the company is feeling the effects of rising wages and the persistent increases in the costs of living. Prospective students “are shifting their priorities towards earning over learning.”

This simple statement has to be considered troubling for investors in e-learning companies because inflationary trends in the economy seem likely to be present for the foreseeable future. Another point of concern is that student spending trends may have changed quite significantly over the last few months. In early February 2022 when Chegg reported 4Q 2021 earnings the company saw improving trends in the industry. Those signals have apparently vanished.

Chegg cut its 2022 revenue guidance to US$740-US$770 million from the US$830-US$850 million range it issued just three months ago. Similarly, the company slashed its adjusted EBITDA projection for the year to US$220-US$235 million, about 14% less than the previously articulated US$260-US$270 million range. 

Not surprisingly, other leading e-learning companies such as Coursera, Inc. (NYSE: COUR) and 2U, Inc. (NASDAQ: TWOU) have corrected along with Chegg. However, all of these stocks continue to trade at fairly robust valuations, not at the heavily discounted metrics that one may have expected after what seems to be a marked degradation in fundamentals.

(in thousands of US $, except where noted)Chegg, Inc. (A)Coursera, Inc. (A)2U, Inc.  (B)
Stock Price$19.70$17.93$9.27
Shares Outstanding (Millions)126.68143.7276.99
Stock Market Capitalization$2,495,596$2,576,900$713,697
Adjusted EBITDA$227,500($45,500-$51,500)$80,000
Enterprise Value (EV)$3,004,424$1,814,819$1,438,732
EV/Adjusted EBITDA13.2N/M18.0
(A) Balance sheet data from 3/31/22.  Income/cash flow statement projection from midpoint of current full-year 2022 company guidance. (B) Balance sheet data from 12/31/21.  Income/cash flow statement projection from midpoint of full-year 2022 company guidance.

Chegg still trades at a rich enterprise value-to-projected adjusted EBITDA level of more than 13x. The cash flow multiple of 2U is even higher, 18x. Coursera expects to post an EBITDA loss of around US$50 million this year, so a ratio cannot be computed.

A potential confirmation of this slowdown is a report in Indian media that BYJU’S, a private India-based company which is acknowledged as the world’s leading e-learning company, is experiencing a significant dip in demand for its services. The reopening of schools and colleges in that country is impacting even the strongest edtech company.

Investors should consider reducing exposure to the edtech space. Fundamentals seem unlikely to turn back in the companies’ favor for some time, and the stocks as a group are not yet trading at discount valuations.

Chegg, Inc. last traded at US$19.70 on the NYSE.

Information for this briefing was found via Edgar and the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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