Investors Don't See Light At End Of Chegg, Inc.'s (NYSE:CHGG) Tunnel And Push Stock Down 42%

To the annoyance of some shareholders, Chegg, Inc. (NYSE:CHGG) shares are down a considerable 42% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 52% share price decline.

Even after such a large drop in price, Chegg may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 4.3x, since almost half of all companies in the United States have P/E ratios greater than 15x and even P/E's higher than 29x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Chegg as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Chegg

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Chegg.

What Are Growth Metrics Telling Us About The Low P/E?

Chegg's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 325% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 108% as estimated by the analysts watching the company. That's not great when the rest of the market is expected to grow by 5.0%.

In light of this, it's understandable that Chegg's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

Chegg's P/E looks about as weak as its stock price lately. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Chegg maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Chegg (2 are a bit unpleasant) you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.