Why Is Chegg (CHGG) Stock Rocketing Higher Today

Petr Huřťák /
2024/06/18 12:09 pm EDT

What Happened:

Shares of online study and academic help platform Chegg (NYSE:CHGG) jumped 28.8% in the pre-market session after the company announced a new restructuring plan, which also involves refocusing on its core audience (mostly Students) in a Shareholder Letter shared with the public. This effort will involve the provision of more individualized support to learners via a single platform enabled with AI (artificial intelligence) capabilities. 

The restructuring effort includes the layoff of 441 employees, which represents 23% of the company's global workforce. David Longo, Chegg's Chief Financial Officer added that, "We expect the restructuring will result in non-GAAP expense savings for 2025 of $40 million - $50 million. For 2025, we remain committed to our goal of 30%+ Adjusted EBITDA margin, and we believe we can deliver at least $100 million in Free Cash Flow. We are also reiterating our previous second-quarter guidance that we provided on April 29, 2024." Overall, the update highlights the company's focus on improving growth and profitability, with some of the cost reduction efforts highlighted likely to positively impact the bottom line in the near term.

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What is the market telling us:

Chegg's shares are not very volatile than the market average and over the last year have had only 20 moves greater than 5%. Moves this big are very rare for Chegg and that is indicating to us that this news had a significant impact on the market's perception of the business. 

The biggest move we wrote about over the last year was about 2 months ago, when the stock dropped 22.7% on the news that the company reported first-quarter results and provided revenue and EPS guidance for the next quarter, which missed analysts' estimates. The weak guidance was triggered by a worse-than-expected outlook for its subscription revenue, which has higher margins than its other revenue streams. During the quarter, its revenue and subscribers were in line with expectations while its EPS and EBITDA slightly beat. 

Overall, this was a mediocre quarter for Chegg, and the violent stock move reflects the heightened fear that this company may not exist in a year or two as AI renders its services--study guides and answer keys for students--obsolete.

Chegg is down 73% since the beginning of the year, and at $3.06 per share it is trading 73.2% below its 52-week high of $11.41 from December 2023. Investors who bought $1,000 worth of Chegg's shares 5 years ago would now be looking at an investment worth $76.62.

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