Goldman Sachs raises Chegg rating to neutral, cuts stock target on earnings report
On Tuesday, Goldman Sachs adjusted its stance on shares of Chegg Inc (NYSE:CHGG), upgrading the stock from Sell to Neutral, while also reducing the price target to $3.75 from the previous $7.00. The revision comes in the wake of Chegg’s second-quarter earnings report, which surpassed the company’s own expectations for revenue and adjusted EBITDA.
Despite these positive results, Chegg’s third-quarter guidance suggested a significant shortfall compared to Goldman Sachs and Street estimates, with anticipated revenues and adjusted EBITDA falling roughly 10-15% and 45-50%, respectively, below expectations.
Chegg management highlighted several key points during the earnings call, including the expected benefits from a June restructuring that aims to save $40-50 million in non-GAAP operating expenses by 2025.
Moreover, management projects a 30% adjusted EBITDA margin and over $100 million in free cash flow for the same year. The company is also progressing with its product roadmap, focusing on the integration of more AI services, and has observed encouraging global engagement trends.
The focus for Chegg in the near term revolves around the late third-quarter start of the school year, which will be a determining factor for student engagement, growth, and monetization, especially in light of the company’s current guidance.
Looking further ahead, Chegg’s management is concentrating on retention rates, expanding the scope of questions, including year-over-year query growth, and enhancing product personalization into the second half of 2024 and into 2025.
Goldman Sachs acknowledges that while their models do not predict an adjusted EBITDA margin recovery to above 30%, the current share price levels suggest that a further downside is now challenging to envisage. The upgrade to Neutral reflects a more balanced risk/reward ratio, and the revised price target takes into account the updated financial outlook provided by Chegg.
In other recent news, education technology firm Chegg Inc. (NYSE:) disclosed mixed results for the second quarter of 2024 amid significant restructuring. The company surpassed its own revenue and adjusted EBITDA guidance for the quarter, reporting $146.8 million in revenue and $44.1 million in adjusted EBITDA. However, Chegg faced an 11% year-over-year decline in total revenue, dropping to $163 million. These recent developments also include a $481.5 million non-cash impairment charge and a negative free cash flow of $3.6 million.
Chegg’s CEO, Nathan Schultz, shed light on the company’s strategic efforts to enhance its product offerings through AI integration and international expansion. The AI integration has been well-received, with 70% of subscribers engaging in conversational instruction. The company also plans to expand internationally, starting with Mexico, which is set to be Chegg’s first fully localized market.
Looking forward, Chegg aims to reach a 30% EBITDA margin and $100 million in free cash flow by 2025. Future plans also include expansion into Canada, Australia, the United Kingdom, Turkey, and South Korea. Despite the current challenges, Chegg remains committed to achieving its long-term financial targets.
InvestingPro Insights
As Chegg Inc (NYSE:CHGG) navigates through its restructuring and aims for improved financial metrics in the coming years, real-time data from InvestingPro offers a snapshot of the company’s current financial health. Chegg’s market capitalization stands at approximately $299.5 million, indicating the scale of the business in the competitive online education sector.
Despite recent challenges, the company boasts a robust gross profit margin of 73.21%, underscoring its ability to maintain profitability on its services. This aligns with one of the InvestingPro Tips highlighting Chegg’s impressive gross profit margins.
Moreover, Chegg’s Price / Book ratio of 0.31 suggests the stock might be undervalued relative to its assets, which could be an attractive point for value investors, as per another InvestingPro Tip. However, reflecting the concerns raised by Goldman Sachs, Chegg’s stock has experienced a significant price decline over the last year, with a one-year total return of -72.07%. This volatility is echoed in the short-term performance, with a one-week total return of -13.82%.
For investors seeking a deeper analysis, InvestingPro provides additional tips that can guide investment decisions. There are 12 more InvestingPro Tips available, which include expectations for net income growth this year and predictions on the company’s profitability. To explore these insights and more, investors can visit InvestingPro’s dedicated page for Chegg at https://www.investing.com/pro/CHGG.
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