Chegg (NYSE:CHGG) is scheduled to report fiscal 2021 fourth-quarter earnings on Feb. 7. The company's shares have fallen significantly since its last reported earnings. Investors were surprised to hear that student enrollment at colleges in the U.S. had dropped.
While enrollment trends are unlikely to have changed much since the last time Chegg reported earnings, there is one critical metric that investors should watch. One of Chegg's competitive advantages is the treasure trove of content it owns. Those interested in the education technology company will want to see how much new content is added when it reports Q4 results.
Heading off to college can be a harrowing experience. Image source: Getty Images.
Content is the key to Chegg's competitive advantage
As you may already know, Chegg is a subscription business geared primarily toward college students. Learners pay Chegg between $15 and $20 per month for access to the platform. The main draw for students is the 70 million pieces of proprietary content. These step-by-step explanations were created at the request of subscribers. In addition to access to existing content, subscribers get to ask 20 questions per month that Chegg's subject-matter experts answer.
Of course, the more students enroll in college-level classes, the more demand for Chegg's services exists. For that reason, the stock got slammed when the company reported a dramatic slowing of the education industry in its most recent earnings press release on Nov. 1. Chegg lowered guidance for its fourth quarter and the fiscal year in conjunction with this revelation. Still, Chegg cannot influence the number of students taking college courses, so its efforts should be more focused on serving its 4.4 million existing subscribers.
That's where content creation could come into play. If Chegg created millions of new pieces of content, that means existing subscribers were highly engaged and are likely to stick around throughout their duration in college. What's more, the newly created content can work to attract new subscribers for several years or much longer (college curriculum generally does not change very much). Finally, the expansion of Chegg's content database will deepen its competitive advantage.
One of the downsides of Chegg's business model is that it serves a relatively small, addressable market -- mainly college students. The flip side is that Chegg is a dominant player in that market. Chegg is a verb on college campuses now. It's not rare to hear students tell each other to "Chegg" it. And the core of its competitive advantage is its treasure trove of assets.
What this could mean for Chegg investors
Analysts on Wall Street expect Chegg to report revenue of $195.2 million and earnings per share (EPS) of $0.31 for Q4. If it meets those projections, that would amount to declines of 5.1% and 43.6%, respectively, from the same period a year earlier. Wall Street's estimate for revenue of $195 million is at the midpoint of what management guided for in the quarter.
Chegg's stock is down 56% in the past three months. More important than the fourth quarter's results will be management's projections for 2022. If it forecasts improving subscriber growth and student enrollment, that could boost the stock higher.
