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Why Chegg Should Be on Your Radar

If you aren't in college -- or the parent of an undergrad -- you may never have heard of Chegg (NYSE: CHGG). But if you fit into either of those demographics, the education technology company is on your side: Originally just a seller of textbooks, it pivoted its model to renting them some years back, and now also offers tutoring, e-books, and help with landing grants and loans, among other things.

In short, it's trying to cut down on the rising costs of higher education, and based on its most recent results, it's doing a good job. In this segment from MarketFoolery, host Mac Greer and senior analysts Andy Cross and Jason Moser talk about Chegg's business model, the risks if Amazon decides to challenge it, and more.

A full transcript follows the video.

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This video was recorded on Feb. 12, 2019.

Mac Greer: Let's close with a story about a company name Chegg. Jason, I didn't even know about this company. I'd never heard the name. That's part of what makes life interesting. Discovery is the spice of life, or, it's one of the spices. Chegg is an education technology company that offers online textbook rentals, homework help, online tutoring, scholarships, internship matching, and the like. Chegg shares up around 9% today on earnings. This is not a small company. This is between $4 [billion] and $5 billion.

Jason Moser: Speaking of spices, let's talk a little bit about McCormick, Mac, because that's really a business that's -- Just kidding, everybody! All right, Chegg. This is a company I've covered for a number of years. I started following it back in 2014 because it was interesting to me from a parent's perspective. Having gone to college, I saw what they were doing. The basic business back then was selling college textbooks to students, and then they got into the business of renting college textbooks to students, physical books. What really struck me, the damning chart for the case for this business, was the absurd increase in the price of college textbooks through the years. You go back to the mid-'70s, the prices on college textbooks were outpacing medical services, new home prices, even the CPI. If you think about it, that's extremely backwards. When you're a student, you don't have a whole heck of a lot to put on the line, and we're trying to educate our young population to be able to go do more things. We can't put them behind the eight ball by making it so they can't even afford their books.

What they did -- and really, I give all of the applause here to CEO Dan Rosensweig -- was basically pivoting this business to a digital business. Instead of being physical books, let's start going beyond books, let's develop a network, a full-on offering of all sorts of different services, from digital books to tutoring services, you name it, their Chegg Services business has it. Now, they're bringing on students beyond college students, we're talking about middle school and high school students, bringing them into that network. They educate people on how to pursue student loans, grants, things like that to get into college. To me, it's an example of a business that saw a lot of inefficiencies in a very important demographic in students and decided to try to eliminate as much of those inefficiencies as possible and return a lot of value.

With all that said, my one real concern with this business, because they make most of their money through that Chegg Services, which is subscriptions, students aren't known for having a whole heck of a lot of money, so the pricing power on that subscription may be a little bit questionable. And, the stock is not cheap. It's not like it's a profitable business. It's trading at like 100 times cash flow. Take that for what it's worth.

But this was a $6 stock five years ago, Mac. It's closing in on $40 now. Hats off to Dan for really turning this business around.

Greer: Do you think five years from now, they're still chugging along?

Andy Cross: Come on!

Greer: That was too easy. Or, do you think they get acquired by someone like Amazon? When I first read about this company, my first big question is, what keeps Amazon from going into that space and gobbling it up?

Moser: If you remember, Amazon got a little bit into the student book side of things. Barnes & Noble always was a player in that. I think therein lies the importance of Chegg diversifying their business beyond just books and really offering educational services, tutoring and whatnot. I really thought Amazon would be a natural acquirer for a business like this a time ago because it was a lot cheaper. To me, it seemed like a great way to get immediate access to an up-and-coming generation of Prime members who would be developing a relationship with Amazon at a younger age. That could still happen. I don't know. But it sure does seem like they're doing just fine on their own.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Andy Cross has no position in any of the stocks mentioned. Jason Moser owns shares of AMZN and MKC. Mac Greer owns shares of AMZN. The Motley Fool owns shares of and recommends AMZN. The Motley Fool recommends MKC. The Motley Fool has a disclosure policy.

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