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Online learning explodes

May 13, 2020


Chegg, Inc., known as Chegg, is an American education technology company based in Danta Clara, California with over three million subscribers. Chegg provides digital and physical textbook rentals, online tutoring and other services.

Acquisitions have played a big part in the growth of the group.

“In 2010, Chegg made its first acquisition, purchasing CourseRank. In 2014 Chegg acquired Cramster a provider of online homework help,[and Notehall an online marketplace for class notes. In 2011, Chegg acquired Zinch, a scholarship search and networking service for high school students and college recruiters, and continues to offer the service, under the Chegg brand name. Chegg acquired online tutoring platform InstaEDU, in 2014, for a reported $30m, renaming the division Chegg Tutors as well as Chegg acquired Imagine Easy Solutions, a provider of online bibliography and research tools, for a reported $42m, in 2016. In 2017, the company acquired Cogeon GmbH, a German maths education provider, for $15m cash. Cogeon’s App Math 42, uses artificial intelligence to assess individual students’ weaknesses in math, and to inform targeted training. In April 2017, the publisher ,Pearson, unveiled a textbook rental partnership with Chegg. In the pilot program, Pearson made 50 editions of high-volume textbooks (both digital and print) available only to rent. Chegg served as the exclusive rental outlet. In 2018, Chegg acquired WriteLab from Matthew Ramirez for $15m, which uses AI to analyse text and suggest improvements, and online flash card tool StudyBlue. In July 2018, Chegg acquired StudyBlue for approximately $20.8m During late 2019, Chegg acquired online coding school Thinkful,for $80m cash.

Part of the attraction of the business is the strong recurring income.

“By 2016, textbook rentals and student services were about even in company revenues; by 2018, Chegg Services reported 3.1m subscribers, with services accounting for 79pc of revenue. Students may search for both scholarships and internships on the website, and typically pay to access Chegg Services, such as Study, Advanced Writing, Tutors, and Math Solver, on a monthly basis.

In December 2008, $25m was raised from Silicon Valley venture capitalists by Chegg. By April 2016, the company had progressed through 12 funding rounds, garnering $289.6m in venture capital funding, according to Crunchbase. Investors include Foundation Capital, Insight Venture Partners, Kleiner Perkins, Caufield & Byers, Pinnacle Ventures, and TriplePoint Capital.

Chegg began trading shares publicly on the New York Stock Exchange in November 2013.Its IPO was reported to have raised $187.5m, with an initial market capitalisation of about $1.1bn.
So much for the past, what’s happening now, especially in a stay-home world that plays so strongly to Chegg’s strengths. The answer is that the impact of the virus has been very positive.

“While many traditional companies are unfortunately being hit hard as a result, direct-to-consumer companies like Chegg that are digital and serve an essential need, are experiencing increased levels of growth since the outbreak of the COVID-19 virus. Since mid-March, we have seen a mix shift in our business, as advertising revenue has decreased from an industry wide slowdown. While at the same time, we have also seen a substantial increase in our subscription services driven by new U.S. and international subscribers to our platform as well as increased success with our account sharing efforts, and we see these trends continuing into Q2. The first two months of the quarter started strong with subscriber growth at 33pc. And the acceleration of growth since mid-March added an additional two points in the quarter, increasing growth to 35pc. This continued acceleration is having a profound impact on Q2. As we now expect Q2 subscriber growth to be greater than 45pc.”

The longer term outlook also looks good, according to CEO, Dan Rosensweig.

“As you can see from our numbers, Chegg is experiencing dramatic growth during this time. And because we serve millions of students across the globe, many people have asked us what the lessons from COVID-19 are and its impact on the future of higher education. Our belief is that in every industry, a crisis often accelerates the inevitable. And that is what we are seeing happening now in higher education. The reality is students who are already learning online or are under-supported by their schools who have diminishing budgets. So that the need for virtual learning support was already expanded. But almost overnight, when schools around the world had to move 100pc online, that trend accelerated and has revealed the true potential and the value of what Chegg has to offer. The numbers say it best. And what they reflect is that students have an even greater need for high-quality, low cost, personalised and adaptive online education to help them learn and master their curriculum. As we think about the lasting impact on the future of higher education globally, we see these trends continuing. The student population is more diverse and more global. They have different socioeconomic backgrounds and are of many different ages. They also come with various skills and experiences, but what they have in common is the need for more online support because the fact is they are increasingly learning on their own, with less support from their schools. We also believe more students are going to need to learn a variety of new skills over the course of their careers, and will need access to low-cost, on-demand, high-quality skills online.”

On every front the group is flying.

“The Chegg bundle [Chegg Study Pack is a bundle that packages together Chegg Study, Chegg Math Solver and EasyBib plus and sells it for a subscription] has accelerated two to three quarters ahead of where we expected it to be at this point. As you may recall, we said that we were really going to see the impact of it beginning in Q4, but the demand has been significantly higher than we anticipated. International is growing. We were always going to grow at record rates because it was coming from a small base. But it has really accelerated and not just for the English speaking countries but for countries all around the world. The rest of the world business is about the size of England, France, England, U.K. and Australia. So we’re seeing a pickup from everywhere. On the engagement side, we’ve seen more students overall subscribed as you can tell by the numbers. We’ve seen renewals go up, cancellations go down, and utilisation of the services themselves pick up quite significantly. So every metric that we look at that we would want to bet on for the future is going up into the right.”

In answer to a question – is the growth sustainable, this is what Rosensweig said:

“I do. And the reason why is because our product is great and we keep investing in it. We expand the number of subjects. We expand the way people can learn. We kept the price at $14.95 for nearly 10 years. It’s on demand. You can do step-by-step solutions. You can watch videos on the subjects that you want to master, you can ask expert Q&A which now has access to 40m questions. We’re seeing a record number of questions and a record number of subjects from a record number of countries. And so once you’ve experienced the power of Chegg’s learning tools, there is no reason not to use it more. If the question is on the subscriber growth, what we believe is that we’ve hit another inflection point in our business particularly internationally, which is the way we built the business in the U.S. as it was a very carefully crafted by word of mouth school-by-school. And what this situation has presented to us is when international also closed all their schools, their students for the first time started to look for online tools. They discovered Chegg and they’re using it at the same level that domestic students are using it. So my belief is as we add more subjects, as we add more content, as we go for higher grade, lower grades, as where response time continues to go up, our quality is topnotch, there’s no reason for the engagement to go down. Now, there are students that we believe that we picked up who used to use on-campus services like labs, tutors and other things. Unfortunately, if you look at the state of higher education, every budget is being cut and sadly those will be among the first services that will be cut. But even if they weren’t, once you’ve experienced Chegg and once you’ve learned how it can help you, and once it really teaches you and you master the subject, there’s really no reason, given the price is only $14.95 or $19.95, if you bought the bundle which gets you writing and math on top of that, for you to stop using it. And every indication that we see suggests that the more they experience it, the more they use it and the better results they get.”

He has a product to sell so he is not going to look for the negatives but the obvious conclusion is that Chegg is indeed well placed to prosper in a world that has likely been changed for ever by the pandemic experience.

It is also clear that the company is excited by what is happening.

“We are an online support service. It’s not, whether the curriculum is taught offline or online by the tools, Chegg is the beneficiary, in fact that more and more students need more and more help. And there is only one service that has incredibly high quality and the integrity is on demand, is low cost and covers every conceivable subject that you can imagine, whether it’s by step-by-step solution video and those things. So the challenge that we’re experiencing now is a great one to experience, which is how do we make sure that our infrastructure can scale with the demand that we’re experiencing, because as Andy pointed out in his prepared remarks, we saw a significant pick up the last few weeks of March, but that has continued. And so we’re seeing record numbers of questions asked, The challenge is making sure that we have enough tutors in the system that we can be responsive within five minutes of any request in any subject, in any language and we’re a distance from doing that. So it’s not going to be a demand problem as much as there’s going to be supply problems for a while.

But what happens in any good two-sided marketplace is when the demand comes in then the supply follows it and we’re beginning to see that. So what we’ve done is we’ve expanded chat based tutoring which means that students can at any time ask any question and actually have a live interaction, if they prefer to do that versus search the database which has nearly 40m questions already asked. We believe that Chegg has been — I mean, look, we’ve been growing this business by nearly 30pc [annually] for over six years. It is another inflection point for us because people really value it, they understand it and those who may have been reluctant are now trying it and they’re trying it at the same level. They’re renewing at the same level. So we’re very pleased with all the results and I think the addition of the bundle rolling it out faster when students needed it. Even the engagement there, I mean, you see that those people who use the bundle actually asked more questions versus people who don’t use the bundle. So it’s attracting the right kind of people and we’re seeing that same response globally.

The company is on a roll, prospects look exciting and the shares are being added to the QV for Shares portfolio.

As I have been saying it is a bipolar world out there with big winners and many losers. This is pulling share prices every which way so we have strong up days followed by strong down days. Share selection is key and that is the overwhelming focus of QV. Chegg looks an excellent example of the kind of forward looking 21st century business in which subscribers should be investing. They may not be cheap but they are high quality – classic 3G and plenty of magic.

The most exciting possibility is that Chegg is kind of Netflix for the student community!

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