Chegg (CHGG)

Online study and academic help platform Chegg (NYSE:CHGG) reported Q1 CY2025 results beating Wall Street’s revenue expectations, but sales fell by 30.4% year on year to $121.4 million. On the other hand, next quarter’s revenue guidance of $101 million was less impressive, coming in 9.2% below analysts’ estimates. Its non-GAAP loss of $0.06 per share was significantly below analysts’ consensus estimates.

Company Overview

Started as a physical textbook rental service, Chegg (NYSE:CHGG) is now a digital platform addressing student pain points by providing study and academic assistance.

Consumers today expect goods and services to be hyper-personalized and on demand. Whether it be what music they listen to, what movie they watch, or even finding a date, online consumer businesses are expected to delight their customers with simple user interfaces that magically fulfill demand. Subscription models have further increased usage and stickiness of many online consumer services.

Competitors offering streaming entertainment platforms include Coursera (NYSE:COUR), Udemy (NASDAQ:UDMY), and private company Khan Academy.

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last three years, Chegg’s demand was weak and its revenue declined by 10.2% per year. This wasn’t a great result and suggests it’s a low quality business.

This quarter, Chegg’s revenue fell by 30.4% year on year to $121.4 million but beat Wall Street’s estimates by 5.8%. Company management is currently guiding for a 38.1% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to decline by 25.8% over the next 12 months, a deceleration versus the last three years. This projection is underwhelming and indicates its products and services will see some demand headwinds.

User Growth

As a subscription-based app, Chegg generates revenue growth by expanding both its subscriber base and the amount each subscriber spends over time.

Chegg struggled with new customer acquisition over the last two years as its services subscribers have declined by 13.4% annually to 3.2 million in the latest quarter. This performance isn't ideal because internet usage is secular, meaning there are typically unaddressed market opportunities. If Chegg wants to accelerate growth, it likely needs to enhance the appeal of its current offerings or innovate with new products.

In Q1, Chegg’s services subscribers once again decreased by 1.46 million, a 31.3% drop since last year. The quarterly print was lower than its two-year result, suggesting its new initiatives aren’t moving the needle for users yet.

Revenue Per User

Average revenue per user (ARPU) is a critical metric to track because it measures how much the average user spends. ARPU is also a key indicator of how valuable its users are (and can be over time).

Chegg’s ARPU has been roughly flat over the last two years. This raises questions about its platform’s health when paired with its declining services subscribers. If Chegg wants to increase its users, it must either develop new features or provide some existing ones for free.

This quarter, Chegg’s ARPU clocked in at $37.93. It grew by 1.3% year on year, faster than its services subscribers.

For internet subscription businesses like Chegg, gross profit tells us how much money the company gets to keep after covering the base cost of its products and services, which typically include customer service, data center and infrastructure expenses, royalties, and other content-related costs if the company’s offerings include features such as video or music.

Chegg has robust unit economics, an output of its asset-lite business model and pricing power. Its margin is better than the broader consumer internet industry and enables the company to fund large investments in new products and marketing during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an excellent 68.1% gross margin over the last two years. That means Chegg only paid its providers $31.93 for every $100 in revenue.

Chegg’s gross profit margin came in at 55.5% this quarter, down 17.8 percentage points year on year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Unlike enterprise software that’s typically sold by dedicated sales teams, consumer internet businesses like Chegg grow from a combination of product virality, paid advertisement, and incentives.

Chegg is quite efficient at acquiring new users, spending only 27.7% of its gross profit on sales and marketing expenses over the last year. This efficiency indicates that Chegg has a highly differentiated product offering, giving it the freedom to invest its resources into new growth initiatives.

Investors frequently analyze operating income to understand a business’s core profitability. Similar to operating income, EBITDA is a common profitability metric for consumer internet companies because it removes various one-time or non-cash expenses, offering a more normalized view of profit potential.

Chegg has been a well-oiled machine over the last two years. It demonstrated elite profitability for a consumer internet business, boasting an average EBITDA margin of 26.3%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Chegg’s EBITDA margin decreased by 13.1 percentage points over the last few years. Even though its historical margin was healthy, shareholders will want to see Chegg become more profitable in the future.

This quarter, Chegg generated an EBITDA profit margin of 15.9%, down 10.9 percentage points year on year. Since Chegg’s gross margin decreased more than its EBITDA margin, we can assume its recent inefficiencies were driven more by weaker leverage on its cost of sales rather than increased marketing, R&D, and administrative overhead expenses.

We track the change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sadly for Chegg, its EPS declined by 31.3% annually over the last three years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.

We can take a deeper look into Chegg’s earnings to better understand the drivers of its performance. As we mentioned earlier, Chegg’s EBITDA margin declined by 13.1 percentage points over the last three years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q1, Chegg reported EPS at negative $0.06, down from $0.26 in the same quarter last year. This print missed analysts’ estimates. Over the next 12 months, Wall Street expects Chegg to perform poorly. Analysts forecast its full-year EPS of $0.43 will hit $0.12.

Although EBITDA is undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Chegg has shown robust cash profitability, driven by its attractive business model and cost-effective customer acquisition strategy that enable it to invest in new products and services rather than sales and marketing. The company’s free cash flow margin averaged 14.4% over the last two years, quite impressive for a consumer internet business.

Taking a step back, we can see that Chegg’s margin dropped by 14.8 percentage points over the last few years. If its declines continue, it could signal increasing investment needs and capital intensity.

Chegg’s free cash flow clocked in at $15.86 million in Q1, equivalent to a 13.1% margin. The company’s cash profitability regressed as it was 1.4 percentage points lower than in the same quarter last year, suggesting its historical struggles have dragged on.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

Chegg is a well-capitalized company with $88.29 million of cash and $80.27 million of debt on its balance sheet. This $8.02 million net cash position is 11% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly Chegg blew past analysts’ EBITDA expectations this quarter. We were also glad its revenue outperformed Wall Street’s estimates. On the other hand, its number of users declined and its number of services subscribers fell short of Wall Street’s estimates. Overall, this quarter could have been better, but expectations for this company are quite low. The stock traded up 2.7% to $0.70 immediately after reporting.

Updated: June 19, 2025 at 10:28 PM EDT

Are you wondering whether to buy Chegg or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

We see the value of companies helping consumers, but in the case of Chegg, we’re out. For starters, its revenue has declined over the last three years, and analysts expect its demand to deteriorate over the next 12 months. And while its impressive EBITDA margins show it has a highly efficient business model, the downside is its users have declined. On top of that, its projected EPS for the next year is lacking.

Chegg’s EV/EBITDA ratio based on the next 12 months is 2.4x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now.