How Microsoft Could Become an Ed-Tech Company

When I see a very well managed company go down by 40% I see a potential buying opportunity. Let’s see if this is the case with $CHGG.

The education technology company reported revenue of $171.9 million versus $174.5 million estimated, according to Refinitiv. Chegg also missed subscriber estimates. There is an enrollment crisis due to the pandemic and the Great Resignation. Young people are also reprioritizing the future of work.

It’s down 46% just today at the time of writing. The stock was $113 in February, guess what it is now? It’s $33. They have had very good revenue growth for years. Ed-Tech companies have the potential to scale very well into the future.

This is kind of a seasonal rare event for the company.

"In late September, it became clear to us that the education industry is experiencing a slowdown that we believe is temporary. This industry-wide dynamic was unanticipated and it's direct result of the COVID-19 pandemic. A combination of variants, increased employment opportunities and compensation along with the fatigue have all led to significantly fewer enrollments than expected this semester. And those students who have enrolled are taking fewer and less rigorous classes and are receiving less graded assignments. We believe this is a post-pandemic impacts that will affect this school year, but it's not sustainable for higher education long-term," Chegg CEO Dan Rosensweig told analysts on an earnings call. 

Chegg reported third quarter total revenue of $171.9 million, up 12% from the previous year. The consensus estimate was $173.8 million. The company projected sales of $194 million to $196 million for the fourth quarter, short of analysts projections for $241 million. 

The reason I see this as a buy the dip opportunity is how profitable and well managed this company already is. Still the pain could be more than temporary:

• The company also didn't share guidance for the year ahead as it typically does when it reports third quarter results.
• The sentiment is terrible, and it's not going to get better in the next three months. (An Analyst said).

If you a long-term investor in Ed-Tech companies, $CHGG, I think if you can get this below $30 it’s a good investment. It’s at $34 today, it may not even reach that buying price target.

• The company has a market cap of about $9 Billion, which is fair.
• Sales are $750 million.
• The entire education industry is experiencing a slowdown. The company might pivot and become even smarter because of it.

Still it’s a significant miss. Analysts on average expected third-quarter sales of $173.9 million and fourth-quarter revenue of $241.7 million, according to FactSet.

I’ve always liked this brand but they were over-priced. I think the TAM and how they can scale is very good. The stock is down 60% in the last 6 months. If you look at the 5-year chart this is particularly lower than its long-term trend line. In a world where Udemy and Coursera feel massively over-priced, this is a more realistic dip into the Ed-Tech waters.

What do they do?

Chegg, Inc. operates direct-to-student learning platform that supports students on their journey from high school to college and into their career with tools designed to help them to learn their course materials, succeed in their classes, and save money on required materials.

The company offers Chegg Services, which include subscription services; and required materials that comprise its print textbooks and eTextbooks. Its subscription services include Chegg Study, which helps students master challenging concepts on their own; Chegg Writing that provides students with a suite of tools, such as plagiarism detection scans, grammar and writing fluency checking, expert personalized writing feedback, and premium citation generation.

There is also Cheg Math Solver. In short, these tools show a diversified approach to aiding the students with their lives.

That’s not even the end of it, they also have Thinkful. Thinkful, a skills-based learning platform that offers professional courses in the areas of software engineering, UX/UI design, digital marketing, data science, product management, data analytics, product design, and technical project management directly to students.

If Microsoft wanted to get into Ed-Tech, Chegg would be an incredible acquisition. This would help Microsoft revitalize LinkedIn’s own learning tools and connect the dots with the next generation.

Microsoft Could Acquire Chegg One Day

Total revenue is triple what it was in 2017. The reason Microsoft would acquire Chegg is actually it’s strength in India. Chegg is based in Santa Clara, California, but the heart of its operation is in India, where it employs more than 70,000 experts with advanced math, science, technology and engineering degrees.

So how does this scale with the pivot to virtual learning? Subscriptions to Chegg have spiked since nearly every college in the world went virtual. Chegg shares have grown by nearly 800% since its IPO in late 2013.

Chegg has found an incredible product-market fit in an extremely large TAM. They have raised $227 million to take and made 16 acquisitions. They could become one of the global winners in the end-game consolidation of the Ed-Tech industry, and we’ll know more of if this is the case by 2025.

While it is over our usual price multiple, the story and the dip is convincing to my arithmetic to warrant a small entry position.

For my serious coverage of micro cap stocks go to StockQuest. My Buy calls for premium members take place twice a month and are where my best calls are made with price targets in a swing trading buy the dip strategy that’s scalable to compound brokerage accounts.

You still have to do the work to buy at the right moment and sell at the right moment. Nobody can do that for you.