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Chegg Stock, CHGG, Slumps 36% On Earnings Beat – Why?

Tim Worstall
Tim Worstall trader
Updated 3 May 2022

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Key points:

  • Chegg stock has dropped 36% premarket this morning
  • Results were announced after the bell last night
  • They were an earnings beat – so why the fall?
  • What Makes a Safe Stock?

Chegg Inc (NYSE: CHGG) stock is down 36% this morning on the back of Q1 earnings announced last night. What’s causing a certain amount of confusion is that the results were, in fact, an earnings beat, yes the Chegg stock price is responding by falling so precipitately.

Chegg provides online learning tools and capabilities, and we’d think that in this ever more online world, that would be doing well. And, by some measures, Chegg is indeed doing well. For example, the results announced were a non-GAAP EPS of $0.32, which beat expectations by $0.08. Earnings is what a company is really all about, so that’s good. On the other hand, revenues was a miss, $202.24m being a miss of $0.72m. Which we might think is slightly weird, only just missing earnings expectations but growing earnings? That means margins are widening, which is a good thing. Or perhaps the argument is that margins be damned in a land race, and instead, resources should be devoted to growth and growth alone?

The problem, though, is not, in fact, in those earnings nor even revenues announced. Rather, it’s in the predictions for what they will be in the time to come.

This being one of those great lessons in stock markets – they’re forward-looking. How much a company has made is interesting, of course, it is, but it’s how much is it going to make which really determines the stock price. So, here, when Chegg reduced its forecast for what future revenues were going to be that drove that significant, 35%, fall in the stock price.

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This wasn’t helped by the manner that Chegg had provided a markedly rosier forecast only 3 months back with the last set of results. Yes, of course, things change over time, that’s why we get regular results from companies. But the change in guidance was a surprise.

Analysts were expecting net revenue of $210 million or so, with a net EBITDA of $77 million. The company guidance is now for $188 to $192 million, with EBITDA at $66 to $68 million. That’s not just lower growth, that’s a retreat from the quarter just gone. Moving from growth to shrinkage – however well explained it might be – is going to knock chunks off a corporate stock price. As it has.

The full-year estimates aren’t looking much better either. The forecast is now for $740 million to $770 million, down from $830 to $850m. EBITDA to $220 – $235m, from previous expectations of $260-$270m. That’s a significant revision in what folk were hoping was to be a growth stock.

As we say above, it’s what happens next which determines a stock price – or at least beliefs about what will happen next. With Chegg itself predicting revenues well done upon previous expectations, then the stock price just was going to take a beating.

Tim Worstall
Tim Worstall is a freelance writer specialising in economics and the financial markets.