AI Integration And TikTok Campaigns Will Drive Institutional Partnerships

Key Takeaways

• Strategic alternatives like acquisition or privatization could stabilize Chegg's revenue amidst challenges from AI-driven competition.
  
• AI integration in products significantly cuts costs, potentially boosting net margins and enhancing student engagement and retention.
  
• Strategic uncertainty, legal challenges, and declining traffic create instability, impacting revenue, net margins, and financial stability due to significant cash outflows.

Catalysts

Provides individualized learning support to students that helps build essential academic, life, and job skills to achieve success in the United States and internationally.

• Chegg's strategic review process, which includes exploring alternatives like acquisition or going private, could potentially maximize shareholder value and stabilize revenue amidst challenges from Google's AI Overviews affecting traffic and acquisitions.
  
• The integration of AI and machine learning into Chegg's products, including advanced personalized learning applications, is reducing content creation costs by over 70%, potentially enhancing net margins.
  
• Chegg's brand marketing efforts, particularly through campaigns on platforms like TikTok, aim to drive traffic and conversions, which are expected to enhance revenue and subscriber growth in 2025.
  
• The business-to-institution strategy is expanding, with Chegg piloting programs to potentially integrate with 35 educational institutions, indicating a diversification of revenue streams and increased institutional partnerships.
  
• The introduction of Solution Scout and enhanced exam preparation tools, which provide differentiated AI-powered solutions, is designed to increase student engagement and retention, which could positively impact earnings through higher subscriber volumes.

Chegg Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Chegg's revenue will decrease by 13.8% annually over the next 3 years.
• Analysts are not forecasting that Chegg will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Chegg's profit margin will increase from -135.5% to the average US Consumer Services industry of 11.4% in 3 years.
• If Chegg's profit margin were to converge on the industry average, you could expect earnings to reach $44.9 million (and earnings per share of $0.39) by about April 2028, up from $-837.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 4.3x on those 2028 earnings, up from -0.1x today. This future PE is lower than the current PE for the US Consumer Services industry at 19.1x.
• Analysts expect the number of shares outstanding to grow by 2.83% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Chegg Future Earnings Per Share Growth

Risks

• The strategic review process, including the possibility of being acquired or going private, indicates uncertainty about the company's future operations, which could create instability and impact revenue projections.
  
• The lawsuit against Google suggests significant challenges with traffic acquisition due to Google’s practices, directly affecting revenue and acquisition growth.
  
• The decline in non-subscriber traffic and overall traffic challenges, exacerbated by Google's AI initiatives, has resulted in a substantial decrease in revenue by 24% year-over-year, directly impacting earnings.
  
• The temporary decline in subscriber retention rates and revenue from subscription services indicates potential volatility in recurring revenue streams and could impact future net margins.
  
• Workforce restructuring and legal challenges, including severance costs and settlements, have brought about significant cash outflows, potentially reducing future free cash flow and affecting financial stability.

Valuation

• The analysts have a consensus price target of $1.233 for Chegg based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $1.5, and the most bearish reporting a price target of just $1.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $395.1 million, earnings will come to $44.9 million, and it would be trading on a PE ratio of 4.3x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of $0.64, the analyst price target of $1.23 is 47.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.