We came across a bullish thesis on Chegg, Inc. (CHGG) on Substack by Antonio Linares. In this article, we will summarize the bulls’ thesis on CHGG. Chegg, Inc. (CHGG)’s share was trading at $2.4 as of Dec 6th. CHGG’s forward P/E was 1.84 according to Yahoo Finance.
A student, their laptop open, using the companies learning platform.
Chegg, once a dominant force in the educational technology sector, has been thrust into a precarious position, with its stock trading at just 0.38 times sales, a valuation signaling imminent bankruptcy. This drastic market reaction stems largely from the disruption caused by ChatGPT and other large language models (LLMs), which have undermined Chegg’s SEO-based traffic moat and altered customer expectations. As students increasingly turn to free AI-powered tools for study assistance, global nonsubscriber traffic to Chegg has plummeted, falling 37% year-over-year in October 2024. Despite these headwinds, a deeper analysis reveals that the market may be underestimating Chegg’s resilience and potential for reinvention, making it a compelling, albeit risky, investment opportunity.
While LLMs have eroded Chegg’s legacy customer acquisition channels, the company has been pivoting strategically under new leadership. Nathan Schultz, who assumed the CEO role in Q1 2024, has championed a vision of rapid iterative development aimed at transforming Chegg from a Q&A platform to a comprehensive 360-degree student support system. Chegg has leveraged its extensive proprietary dataset, accumulated over decades, to develop AI-enhanced features that address student pain points with precision. Innovations such as “Starting Point,” which guides students in tackling academic challenges, and tools that organize notes into study aids, demonstrate the company’s capacity to evolve in response to changing market dynamics. Encouragingly, engagement metrics, such as the Chegg Study global retention rate, have improved significantly, rising from 78.5% in Q2 2024 to 81.8% in Q3.
Despite declining subscriber numbers, the volume of questions asked on Chegg’s platform surged 79% year-over-year in Q3 2024, signaling strong adoption of its new AI features. Additionally, management has identified practice and solution comparison as the most relevant use cases for its AI infrastructure, enabling the company to refine its offerings and deliver better outcomes per dollar spent. These developments position Chegg to potentially outperform generic LLMs, especially as consumer trust in accurate and reliable information becomes increasingly critical.
However, financial pressures remain a concern. Recent quarters have seen Chegg report substantial net income losses, primarily due to non-cash expenses, including goodwill impairments totaling $481.5 million and a $55 million settlement for a securities lawsuit. Yet, Chegg’s cash flow from operations has remained relatively stable, highlighting the underlying strength of its business model. As a result, the company’s financial health is not as dire as its income statement might suggest.
Looking ahead, Chegg must address its reliance on SEO-driven traffic, which continues to erode as LLMs capture more market share. To this end, the company is diversifying its customer acquisition channels, including initiatives on TikTok, Discord, and Chrome extensions, which embed Chegg within students’ workflows. If these efforts succeed, Chegg could mitigate its traffic challenges and rebuild its user base.
While risks remain significant, Chegg’s ability to adapt, its deep dataset, and its targeted AI-driven strategy give it non-zero odds of delivering superior student outcomes and reclaiming market share. For investors, Chegg represents a cautionary tale of tech disruption but also a potential turnaround story with asymmetric upside. The market’s pricing for bankruptcy may be premature, leaving room for substantial upside if Chegg’s transformation succeeds.
Chegg, Inc. (CHGG) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 24 hedge fund portfolios held CHGG at the end of the third quarter which was 24 in the previous quarter. While we acknowledge the risk and potential of CHGG as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CHGG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.