We came across a bullish thesis on Chegg, Inc. (CHGG) on Value Investing Subreddit Page by Prudent-Whale. In this article, we will summarize the bulls’ thesis on CHGG. Chegg, Inc. (CHGG)’s share was trading at $1.39 as of Feb 13th. CHGG’s forward P/E was 1.84 according to Yahoo Finance.
A student concentrate on their laptop in the library, taking advantage of an educational program online.
Chegg, trading at a fraction of its true value, is being severely mispriced by the market, despite its strong fundamentals. With gross margins of 71%, a net cash position following a recent debt repurchase, and a robust capital return program, the company remains financially healthy. The market’s pessimism overlooks these solid metrics, with Chegg currently trading at a price-to-earnings (P/E) ratio of just 2.2x and a price-to-sales (P/S) ratio of only 0.25x. This deep undervaluation stands in stark contrast to more expensive competitors like Coursera and Udemy. Moreover, Chegg’s free cash flow yield of 65.54% further highlights the company’s profitability, demonstrating that it generates significant cash at an undervalued price.
A key undervalued asset in Chegg’s portfolio is its language-learning platform, Busuu, which was acquired for $436 million in 2022. Despite its recent growth, the market continues to undervalue Busuu, which alone is worth more than Chegg’s entire market cap of $150 million. With projected 2024 revenues of ~$43 million and a conservative 5x revenue multiple, Busuu’s valuation could exceed $200 million—well above Chegg’s total value. At a more reasonable 10x revenue multiple, Busuu could be worth upwards of $430 million, nearly three times Chegg’s market cap.
Despite the market’s concerns, the selloff in Chegg’s stock is overdone. While the company has seen a decline in revenue, this drop is exaggerated by sentiment. Chegg’s revenue is down only 34% from its peak in Q4 2021 and just 21% from its best Q3 to its most recent quarter. The company’s current revenue levels are aligned with pre-pandemic figures, not signaling any catastrophic collapse. Additionally, Chegg’s financial flexibility has improved with recent debt repurchases, reducing its debt load to approximately $484 million and leaving it with a cash position of around $534 million. The company has also repurchased $164 million of its stock in the past year—more than its entire current market cap.
Given Chegg’s consistent free cash flow, strong fundamentals, and the potential upside from its AI pivot, the stock presents a compelling investment. A conservative DCF model suggests a fair value of $4.85 per share, and a sum-of-the-parts valuation of Busuu and Chegg Skills alone points to a price target of $4.50 per share, implying over 300% upside. Even if the AI pivot doesn’t succeed, Chegg’s cash position and the value of Busuu and Chegg Skills alone justify a much higher valuation than its current price. Far from being on the brink of bankruptcy, Chegg is positioned for growth and adapting to changing market conditions.
Chegg, Inc. (CHGG) is not on our list of the 30 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.