Chegg (CHGG)

Online study and academic help platform Chegg (NYSE:CHGG) beat Wall Street’s revenue expectations in Q2 CY2025, but sales fell by 35.6% year on year to $105.1 million. On the other hand, next quarter’s revenue guidance of $76 million was less impressive, coming in 12.8% below analysts’ estimates. Its non-GAAP profit of $0.10 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.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Chegg’s demand was weak over the last three years as its sales fell at a 13.3% annual rate. This was below our standards and suggests it’s a lower quality business.

This quarter, Chegg’s revenue fell by 35.6% year on year to $105.1 million but beat Wall Street’s estimates by 3.8%. Company management is currently guiding for a 44.4% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to decline by 27.4% over the next 12 months, a deceleration versus the last three years. This projection doesn't excite us and implies 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 17.4% annually to 2.6 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 Q2, Chegg’s services subscribers once again decreased by 1.77 million, a 40.5% 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 growth has been subpar over the last two years, averaging 1.1%. This raises questions about its platform’s health when paired with its declining services subscribers. If Chegg wants to grow its users, it must either develop new features or lower its monetization of existing ones.

This quarter, Chegg’s ARPU clocked in at $40.43. It grew by 8.3% 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 68.3% gross margin over the last two years. That means Chegg only paid its providers $31.66 for every $100 in revenue.

Chegg produced a 66.3% gross profit margin in Q2, down 6.7 percentage points year on year. Zooming out, however, Chegg’s full-year margin has been trending up over the past 12 months, increasing by 1.3 percentage points. If this move continues, it could suggest better unit economics due to some combination of stable to improving pricing power and 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 27.3% 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 25%. 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 12.8 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 Q2, Chegg generated an EBITDA margin profit margin of 22%, down 5 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.

Revenue trends explain a company’s historical growth, but the change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

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 12.8 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 Q2, Chegg reported adjusted EPS at $0.10, down from $0.24 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 to perform poorly. Analysts forecast its full-year EPS of $0.30 will hit $0.31.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

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 9.7% 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 14.5 percentage points over the last few years. If its declines continue, it could signal increasing investment needs and capital intensity.

Chegg burned through $12.07 million of cash in Q2, equivalent to a negative 11.5% margin. The company’s cash burn was similar to its $3.57 million of lost cash in the same quarter last year. These numbers deviate from its longer-term margin, indicating it is a seasonal business.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

Chegg is a well-capitalized company with $85.64 million of cash and $80.22 million of debt on its balance sheet. This $5.42 million net cash position is 3.7% 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 number of users declined and its number of services subscribers fell short of Wall Street’s estimates. Overall, this quarter was mixed, but expectations for Chegg are quite low, and the stock traded up 2.3% to $1.31 immediately following the results.

Updated: November 8, 2025 at 9:16 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.

We see the value of companies helping consumers, but in the case of Chegg, we’re out. 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 1.5x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now.