On Monday evening, Chegg (NASDAQ:CHGG) reported blockbuster fourth-quarter numbers (PDF) to wrap up a record 2020 for the digital education company. In response to Chegg’s stellar finish to a breakout year, investors pushed CHGG stock up to fresh all-time highs.
That response makes complete sense.
Chegg’s strong earnings report provides further evidence that this shift toward hybrid learning environments and digital learning tools is neither temporary nor localized — it’s a permanent shift toward a new global standard of education.
Chegg is at the epicenter of this shift, with the world’s best all-in-one, end-to-end connected learning platform. And yet, Chegg finished the year with just 6.6 million subscribers, out of a total pool of over 100 million high school and college students in Chegg’s markets.
In other words, this growth story and rally in CHGG stock is just getting started. Long-term, this stock is going to $250.
Chegg’s Blowout Numbers
Chegg’s fourth-quarter earnings report was stellar, and broadly underscores that this business is not losing any momentum, even as the world normalizes and some schools reopen.
Subscriber growth clocked in at 74% in the quarter. That’s a big number. It’s bigger than what Chegg reported in Q2 (67%) and Q3 (69%), which broadly means that as students have returned to school, they aren’t dropping Chegg — rather, they’re using Chegg more as a digital learning companion tool.
Revenues rose 64% in the quarter. That’s also a big number. It’s roughly the same revenue growth rate that Chegg reported in Q2 and Q3. Thus, the company isn’t losing any revenue momentum, either.
Operating margins came in a jaw-dropping 38%. Remember, at the start of the year, operating margins were hovering around 20%. We are seeing rapid growth drive enormous margin expansion through economies of scale — which is to be expected in a hyperscalable, subscription SaaS business model like Chegg.
Overall, it was simply a stellar quarter. It’s no wonder that CHGG stock popped to all-time highs.
A Permanent Shift
If anything, Chegg’s fourth-quarter earnings report underscored this:
The Covid-19-driven shift toward hybrid learning environments and digital learning tools is neither temporary nor localized — it’s a permanent shift toward a new global standard of education.
In other words, the future of learning has arrived.
To be clear, students will still go to school. But the in-person learning environment will be modernized and digitized. Gone are the days of physical textbooks, physical homework assignments, in-person study halls, etc. Here are the days of e-textbooks, online homework assignments, virtual study halls, etc.
The education sector is getting a long overdue, much needed digital makeover. Chegg is at the epicenter of this makeover.
The company provides the market’s best end-to-end connected learning platform that helps student succeed in a more digitized learning environment. This platform has an enormous and wide-reaching value prop, is very affordable, and has basically no competition.
To that end, it’s easy to believe that, one day, Chegg will be as ubiquitously adopted by high school and college students globally as calculators were in the 2000s. If so, then this big rally in CHGG stock is far from done.
Long Runway Ahead for Chegg Stock
There are 102 million high school and college students in Chegg’s target markets that could benefit from using the Chegg platform.
Chegg finished the year with just 6.6 million subscribers. Clearly, there is a long runway ahead for Chegg to keep adding millions of new subscribers every year. Some of that growth will come from more ubiquitous uptake of Chegg in the U.S. Most of that growth will come from Chegg more deeply penetrating international markets.
I see Chegg’s subscriber base swelling to north of 30 million subs by 2030. I also see revenues charging north of $4 billion, and operating margins settling in around 40%.
Under those assumptions, my modeling says that Chegg will easily clear $10 in earnings per share by 2030. Based on a 25X earnings multiple, that implies a long-term price target for CHGG stock of $250.
Thus, this big rally in Chegg stock is just getting started.
Bottom Line on CHGG Stock
The education space is being digitized. This is a huge shift. Chegg is at the epicenter of it. More than that, Chegg is just scratching the surface of its long-term potential as the “new calculator”, or a learning tool that could becoming ubiquitous.
Put it all together, and it becomes obvious that CHGG stock is a long-term winner. Don’t sell long-term winners. Hold them until they become overvalued — which is not the case with CHGG stock, yet.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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