Chegg (CHGG)

Online study and academic help platform Chegg (NYSE:CHGG) announced better-than-expected revenue in Q4 CY2025, but sales fell by 49.4% year on year to $72.66 million. On the other hand, next quarter’s revenue guidance of $61 million was less impressive, coming in 5.5% below analysts’ estimates. Its non-GAAP loss of $0.01 per share was 90.3% 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.

A company’s long-term sales performance is one signal of 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 21.1% per year. This wasn’t a great result and suggests it’s a low quality business.

This quarter, Chegg’s revenue fell by 49.4% year on year to $72.66 million but beat Wall Street’s estimates by 2.3%. Company management is currently guiding for a 49.7% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to decline by 42.3% 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.

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 68.8% gross margin over the last two years. That means Chegg only paid its providers $31.21 for every $100 in revenue.

In Q4, Chegg produced a 57.3% gross profit margin, down 14.8 percentage points year on year. Chegg’s full-year margin has also been trending down over the past 12 months, decreasing by 7.5 percentage points. If this move continues, it could suggest deteriorating pricing power 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 quite efficient at acquiring new users, spending only 27.9% 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.

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 21.9%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Chegg’s EBITDA margin decreased by 15 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 Q4, Chegg generated an EBITDA margin profit margin of 17.7%, down 7.7 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 long-term 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 71.5% 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 15 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 Q4, Chegg reported adjusted EPS of negative $0.01, down from $0.17 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 $0.03 to shrink by 33.3%.

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 mediocre cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 3.8%, subpar for a consumer internet business. The divergence from its good EBITDA margin stems from its capital-intensive business model, which requires Chegg to make large cash investments in working capital (i.e., stocking inventories) and capital expenditures (i.e., building new facilities).

Taking a step back, we can see that Chegg’s margin dropped by 23.5 percentage points over the last few years. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s becoming a more capital-intensive business.

Chegg burned through $15.48 million of cash in Q4, equivalent to a negative 21.3% margin. The company’s cash flow turned negative after being positive in the same quarter last year, suggesting its historical struggles have dragged on.

Companies with more cash than debt have lower bankruptcy risk.

Chegg is a well-capitalized company with $72.82 million of cash and $68.97 million of debt on its balance sheet. This $3.85 million net cash position is 4.5% 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 Chegg’s optimistic EBITDA guidance for next quarter, which blew past analysts’ expectations. We were also excited its EBITDA outperformed Wall Street’s estimates by a wide margin. On the other hand, its revenue guidance for next quarter missed. Overall, we think this was a solid quarter with some key areas of upside. Investors were likely hoping for more, and shares traded down 3.1% to $0.73 immediately after reporting.

Updated: February 9, 2026 at 9:37 PM EST

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

Chegg falls short of our quality standards. First off, 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 2.5x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now.