3 Factors That Make CHGG Risky and One Alternative Stock Worth Considering

Chegg’s Challenging Six Months

Chegg has faced a difficult half-year, with its share price plummeting by 52.8% to just $0.65. This sharp decline has left many investors unsettled and reconsidering their strategies.

Should you consider adding Chegg to your portfolio now, or is caution warranted?

Why We Expect Chegg to Lag Behind

Despite its lower valuation, we remain skeptical about Chegg’s prospects. Below are three key reasons we’re not optimistic about CHGG, along with an alternative stock we prefer.

1. Subscriber Losses Signal Product Challenges

Chegg’s business model relies on growing its subscriber base and increasing customer spending. However, over the past two years, the company has seen its number of service subscribers fall by 20.7% annually. This is concerning, especially given the ongoing expansion of internet usage, which should present new opportunities. For Chegg to reignite growth, it will likely need to improve its current offerings or introduce innovative products.

2. Profit Margins Are Shrinking

To gauge a company’s true profitability, investors often look at operating income and EBITDA, which removes one-off and non-cash expenses for a clearer picture. Chegg’s EBITDA margin has dropped by 15 percentage points in recent years. Although the company once boasted strong margins, investors now want to see a return to greater profitability. Over the past twelve months, Chegg’s EBITDA margin stood at 18.2%.

3. Earnings Per Share on the Decline

Tracking long-term changes in earnings per share (EPS) helps reveal whether a company’s growth is sustainable. Unfortunately, Chegg’s EPS has fallen by an average of 71.5% per year over the last three years—outpacing its revenue decline. This suggests that Chegg’s fixed costs have made it difficult to adapt to weaker demand.

Our Verdict

While we support companies that serve everyday consumers, Chegg’s recent performance leaves us unconvinced. The stock now trades at 2.2 times forward EV/EBITDA (or $0.65 per share), which may look attractive at first glance. However, with its underlying issues, the risks appear significant. There are more promising opportunities available. For example, we favor a leading aerospace company with a proven M&A track record.

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