The stock market is having a down year so far in 2022. Sadly, investors have seen their balances decrease meaningfully. That said, it might be an opportunity to find beaten-down stocks selling at bargain valuations.
Education technology stock Chegg (CHGG -1.83%) could be one of those aforementioned opportunities. The company has done an excellent job serving its core market, and the broad market sell-off has made the stock inexpensive.
Content is king for Chegg investors
Chegg runs a subscription business model where students pay between $15 to $20 per month. In return, they are able to access Chegg’s 84 million pieces of proprietary content (step-by-step solutions to problems). In addition to access to the existing material, students can also ask 20 questions per month as part of their subscription.
Those questions and answers become available for all students to learn from as needed. That has undoubtedly helped Chegg expand from 1.5 million service subscribers in 2016 to 7.8 million in 2021.
The content also acts as a low-cost acquisition tool. Students type their queries into a search engine, and if Chegg has help on the concept they are looking for, it shows up as a search result. A few clicks later, the student gets the support they need, and Chegg adds a new subscriber. There is no need for Chegg to undertake expensive marketing campaigns.
Indeed, in its most recent quarter, Chegg’s total sales and marketing budget was $35.3 million. To put that figure into context, Chegg generated revenue of $194.7 million at that same time. And as Chegg’s content database grows, the company will need to spend less on the material.
Those favorable characteristics have propelled Chegg forward. From 2017 to 2021, Chegg’s revenue increased from $255 million to $776 million. Meanwhile, its operating results went from a loss of $23 million in 2017 to $78 million in 2021.
Chegg’s total addressable market is limited to the 100 million students in high school and college — which still gives the company room to grow.
The market sell-off has brought down Chegg’s stock
Admittedly, the broad market sell-off is not the only reason Chegg’s stock has fallen. Student enrollment at colleges has declined since the COVID-19 pandemic. Understandably, fewer students wanted to be inside crowded classrooms with a potentially deadly virus in circulation.
Overall, the pressures have knocked Chegg’s valuation down. At a price-to-sales ratio of 3.6 and a price-to-free cash flow ratio of 16.5, Chegg has scarcely been cheaper in the last five years. The metrics measure what investors are willing to pay per dollar of sales and cash flow the company generates.
College enrollment can arguably only remain lower temporarily. Education is a highly desired attainment by many. Investors can buy Chegg’s stock today at its cheapest valuation in years. If enrollment rebounds over the next few years, as I suspect it will, it could also cause Chegg’s stock to go higher.
Of course, Chegg is not immune to competition. One option it must contend with is Alphabet‘s (NASDAQ: GOOG) YouTube, which has tons of excellent educational videos that are free. That, and other viable choices, can partly explain why Chegg has only captured 7.8 million of the estimated 100 million student market as mentioned earlier.
If Chegg wants to achieve a higher valuation, it must prove its worth to students and entice them to subscribe to its premium resources.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Parkev Tatevosian has positions in Alphabet (C shares) and Chegg. The Motley Fool has positions in and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool recommends Chegg. The Motley Fool has a disclosure policy.