The recent growth sector meltdown at the hands of a bond market selloff and spiking U.S. Treasury yields has created some golden buying opportunities in the stock market, mostly because this “yield surge” is temporary while the fundamentals underlying many now-cheap growth stocks have long-term staying power. One such golden buying opportunity is in digital education leader Chegg (NASDAQ:CHGG), who has seen its CHGG stock price collapse from a $115 a few weeks ago, to below $90.
Despite this selloff, Chegg remains a future must-have tool in tomorrow’s hybrid learning environment. The company is in the early stages of decade-long growth ramp. And, relative to this bright future, CHGG stock is significantly undervalued today, almost exclusively because of ephemeral rising yields fears.
The investment implication?
Buy the dip and be patient. Long-term, this stock is a big winner.
Here’s a deeper look.
CHGG Stock Is the Future of Education
The bull thesis on CHGG stock really boils down to one big theme: The Covid-19 pandemic sparked a much needed digital transformation in the education sector.
As a recent college graduate who was running through high school and college campuses throughout the 2010s, I can tell you first-hand that academic infrastructure and processes are antiquated and out-of-sync with the rest of the world. Everything kids do these days is digital. They communicate digitally. They play games digitally. And they get their entertainment digitally.
But when it comes school, almost nothing was digital pre-Covid. You had physical textbooks. Pencils and papers. Physical exams. In-person study hours.
To be clear, those things aren’t going away anytime soon. Just like talking to someone in person has value, so does in-person teaching and learning. But, also just as digital tools provide a nice supplement to physical communication, digital tools provide a nice supplement to physical learning.
Think on-demand virtual tutoring. Or digital learning platforms that provide AI-powered assistance on assignments. Or online math problem solvers, or digital test prep courses, or virtual lab walkthroughs.
Those things were seldom used in the academic world pre-Covid. In 2021 and beyond, they’ll become ubiquities. The academic world of tomorrow will comprise a hybrid learning environment that relies on both in-person learning as well as digital tools to create a hyper-convenient, hyper-effective journey for students.
That’s the future. It starts now. And Chegg is at the epicenter of this digital education transformation.
The Must-Have Tool for Hybrid Learning
Chegg has developed a must-have tool for students in the hybrid learning world of the future.
The company started out as a textbook rental business. But, over time, it has morphed into an all-in-one digital learning platform that helps students do, quite literally, anything and everything when it comes to school.
Chegg hasn’t forgotten its roots. The company still allows students to rent and buy textbooks. They’ve just virtualized most of that business today.
Chegg also allows students to get access to step-by-step textbook problem solutions, on-demand tutoring sessions, and expert Q&A through its Study platform.
Through its Writing hub, Chegg helps students write reports, check those reports, and create citations and references for those reports. Through its Prep platform, Chegg helps students study for any course or test, through on-demand academic help resources like virtual flashcards. Chegg also has an advanced online math problem solver than solve various equations your calculator wouldn’t be able to handle, and a marketplace where students can search for and land internships.
Plus, Chegg recently acquired Thinkful, an on-demand, skills-based tutorial platform that teaches subscribers technical skills like coding. The adoption of this platform will also soar in a post-Covid world where hybrid work is the norm.
All in all, Chegg has created a robust digital learning ecosystem that offers students various value props. Need help on your physics homework assignment? Don’t understand how the periodic table is organized? Tough math problem giving you fits? Struggling to write that English paper? Looking to land an internship at a marketing firm?
Chegg can help with all of that — and to that end, I see Chegg turning into a ubiquitously adopted tool in the 2020s.
Big Upside for Chegg Stock
The long-term opportunity for Chegg is enormous. So is the potential upside in CHGG stock.
Here are the numbers.
I estimate that Chegg has about 6 million subscribers in the U.S. today. There are 36 million high school and college students in the U.S. That means that Chegg is already at roughly 17% penetration among U.S. high school and college students, before the hybrid learning environment of the future becomes a widespread reality.
Long-term, Chegg could easily be looking at 30%-plus penetration rates. Not just domestically. But internationally, too. Since non-U.S. students have the same needs, wants, and desires as U.S. students, and Chegg is aggressively fleshing out its platform to work for both English-speaking and non-English-speaking foreign students.
Globally, there are over 100 million students in Chegg’s addressable markets. A 30% penetration rate on that implies 30-plus million subs at scale, up from about 6.5 million today. Assuming average price per subscriber ticks up slightly over time and that profit margins expand gradually with scale, my modeling suggests that CHGG stock is worth around $130 today.
The CHGG stock price today hovers around $90.
Thus, there’s a lot of upside to fair value here.
Bottom Line on CHGG Stock
Chegg stock is one of my favorite growth stocks to buy for the long-term.
But it’s not the best growth stock to buy today.
Instead, the best growth stock to buy today is a company that reminds me of a young Amazon (NASDAQ:AMZN). Indeed, I think buying this stock today could be like buying AMZN stock back in 1997 — before it soared thousands of percent.
Which stock am I talking about?
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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