Chegg (CHGG)

Online study and academic help platform Chegg (NYSE:CHGG) reported Q3 CY2025 results topping the market’s revenue expectations, but sales fell by 43.1% year on year to $77.74 million. On the other hand, next quarter’s revenue guidance of $71 million was less impressive, coming in 13.7% below analysts’ estimates. Its non-GAAP loss of $0 per share was significantly above 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.

Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Chegg struggled to consistently generate demand over the last three years as its sales dropped at a 16.5% annual rate. This wasn’t a great result and suggests it’s a lower quality business.

This quarter, Chegg’s revenue fell by 43.1% year on year to $77.74 million but beat Wall Street’s estimates by 1.9%. Company management is currently guiding for a 50.5% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to decline by 29.1% over the next 12 months, a deceleration versus the last three years. This projection doesn't excite us and suggests its products and services will face some demand challenges.

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 21.7% annually to 2.18 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 Q3, Chegg’s services subscribers once again decreased by 1.65 million, a 43% 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 $35.61. It was flat year on year but outperformed the change in 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 70.7% gross margin over the last two years. That means Chegg only paid its providers $29.30 for every $100 in revenue.

This quarter, Chegg’s gross profit margin was 59.2%, down 9 percentage points year on year. Chegg’s full-year margin has also been trending down over the past 12 months, decreasing by 4.9 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs.

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 very efficient at acquiring new users, spending only 25.7% of its gross profit on sales and marketing expenses over the last year. This efficiency indicates that it has a highly differentiated product offering and strong brand reputation, giving Chegg the freedom to invest its resources into new growth initiatives while maintaining optionality.

EBITDA is a good way of judging operating profitability for consumer internet companies because it excludes various one-time or non-cash expenses (depreciation), providing a more standardized view of the business’s 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 24.5%. 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 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.

In Q3, Chegg generated an EBITDA margin profit margin of 17%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

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.

Diving into the nuances of Chegg’s earnings can give us a better understanding of its performance. As we mentioned earlier, Chegg’s EBITDA margin was flat this quarter but declined by 13 percentage points over the last three years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q3, Chegg reported adjusted EPS of $0, down from $0.09 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street expects Chegg’s full-year EPS of $0.21 to shrink by 67.2%.

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 impressive cash profitability, driven by its attractive business model and cost-effective customer acquisition strategy that give it the option to invest in new products and services rather than sales and marketing. The company’s free cash flow margin averaged 9.4% over the last two years, better than the broader consumer internet sector.

Taking a step back, we can see that Chegg’s margin dropped by 16.5 percentage points over the last few years. If its declines continue, it could signal increasing investment needs and capital intensity.

Chegg burned through $943,000 of cash in Q3, equivalent to a negative 1.2% margin. The company’s cash flow turned negative after being positive 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 $96.39 million of cash and $77.91 million of debt on its balance sheet. This $18.48 million net cash position is 19.1% 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 happy its revenue outperformed Wall Street’s estimates. On the other hand, its revenue guidance for next quarter missed and its EBITDA guidance for next quarter fell slightly short of Wall Street’s estimates. Overall, this was a softer quarter. The stock traded up 2.3% to $0.91 immediately after reporting.

Updated: November 25, 2025 at 9:40 PM EST

Before making an investment decision, investors should account for Chegg’s business fundamentals and valuation in addition to what happened in the latest quarter.

We cheer for all companies serving everyday consumers, but in the case of Chegg, we’ll be cheering from the sidelines. To begin with, 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 2.1x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment.