Chegg Stock Falls after Q4 Earnings as Tepid Guidance Spooks Markets

Chegg stock is trading sharply lower in US premarket price action today after reporting its Q4 earnings as the online learning company provided light guidance.

Chegg reported revenues of $188 million in the quarter and while the metric fell 8% YoY it was slightly ahead of estimates. The company’s subscription revenues which account for the bulk of its sales came in at $166.3 million which was 6% lower than the corresponding quarter last year.

Chegg reported a YoY fall in revenues

In the full year, the company’s revenues fell 7% YoY to $716.3 million. Like fellow “stay-at-home” winners, Chegg is also battling a severe slowdown. The company’s revenues peaked at $776 million in 2021 which was nearly twice what it posted in 2019. However, the revenues fell to $767 million in 2022 and dipped even further last year as the online learning platform admitted that students’ increased use of ChatGPT was hurting its revenues.

The company is focusing on international markets and last year its international revenues surpassed $100 million which was 14% of its revenues. In 2021, international revenues accounted for around 11% of the company’s total sales. Of the company’s 7.7 million subscribers, 2 million are in international markets.

To revive its growth, Chegg is offering promotional pricing. During the earnings call, Chegg’s CEO Daniel Rosensweig said, “we are building sharing into our service to increase word of mouth, expanding our presence on TikTok and enhancing our SEO with increased questions from automated answers.”

He stressed, “Our business model benefits from more students asking more questions as we index those questions into search and other platforms to drive even more customers.”

Meanwhile, Chegg reported an adjusted EPS of 36 cents which was in line with estimates. The company posted a GAAP gross margin of 76% in the quarter.

It appointed David Longo who was its Chief Accounting Officer and Corporate Controller as the CFO. Longo would replace Andrew Brown who is retiring after being at the company for over 12 years.

Chegg’s guidance disappointed markets

Chegg forecast revenues between $173 million-$175 million for the first quarter which trailed analysts’ estimate of $180.1 million. It expects adjusted EBITDA of between $43 million-$45 million which is significantly lower than the fourth quarter.

The company has been enhancing its AI capabilities to take on the likes of ChatGPT but these initiatives are taking time. Rosensweig said, “There are a number of exciting opportunities ahead of us in 2024, and we remain focused on the following priorities: returning to new account growth globally, maintaining strong margins and cash flow, rolling out the next phase of Chegg’s enhanced AI services, and leveraging our momentum and skills for continued growth.”

AI has been a headwind for Chegg

During the Q4 earnings call, Rosensweig was quite upbeat on Chegg’s AI capabilities and said, “As the hype of AI dies down, leaders in their verticals like Chegg are taking control of their own destiny by building their own models, which allows for higher quality and lower cost.”

He added, “As an example, the cost to answer a new question using our own AI models is already more than 75% less expensive, and we believe it will continue to decline over time. This means we’ll be able to serve more students at a lower cost per student, faster and in more subjects and languages. We are confident in the value of our new product.”

Goldman Sachs downgraded online learning stocks

Meanwhile, some analysts are wary of the impact of AI on online learning platforms, and last month, Goldman Sachs downgraded Chegg, Coursera, and Duolingo. In his prepared remarks, Rosensweig said, “The process of embedding AI into every facet of Chegg’s platform is ongoing and iterative as we build a truly personalized learning assistant, a service that anticipates the student needs, adapts to their strengths and weaknesses, and supports them academically, professionally and personally.”

After the earnings release, Piper Sandler analyst Arvind Ramnani downgraded the stock to underweight from neutral and cut his target price to $8.5 terming the earnings “lackluster.”

Ramnani however said, “Chegg delivered modest upside on muted 4Q expectations, wrapping up a year with sustained revenue headwinds.”

Chegg has scaled up buybacks

Meanwhile, Chegg scaled up share buybacks last year and repurchased $597 million of outstanding convertible notes at a $92 million discount to par. These actions helped lower its outstanding share count by 19% as Chegg said that it finds the shares “undervalued.”

Meanwhile, Chegg stock has continued its dismal run in 2024 and looks set to fall even further today looking at the pre-market price action where it is down over 7%.