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Chegg Is Another 2014 Sleeper to Watch

NEW YORK (TheStreet) -- Chegg (CHGG - Get Report) received a bunch of initiations from Wall Street firms on Monday. Most of them were positive with price targets between $11 and $14 per share.

Yet, the shares consistently dropped through Monday's session and finished down more than 7% on the day below $9 a share. They're still at those levels. What was the reason for the apathetic reaction by investors?

Although the various analyst reports were positive, with statements that Chegg is the leading platform connecting pre-, current, and post-college students to advertisers, colleges, and potential employers, most investors seemed concerned that it's a space with too much competition - going after a target demographic that turns over every four years.

Nevertheless, I continue to think that Chegg is a sleeper hit going into 2014 and started accumulating stock a few weeks ago after its post-IPO drop.

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Why do I like Chegg in 2014?

Its CEO, Dan Rosensweig, is a winner. I first came to know Dan when he was the COO for Terry Semel back at Yahoo! (YHOO - Get Report) in the mid-2000s. Dan was highly regarded then -- and for good reason.

It was Dan who:

- flew to China to shake hands with Jack Ma in 2005 and sealed the $1 billion investment Yahoo! made in Alibaba.

- shook hands with Mark Zuckerberg in 2006 to buy Facebook (FB - Get Report) for $1 billion before the Yahoo! board got cold feet and nixed the deal.

- is just one of those execs just as capable and talented as any other successful tech exec -- yet he doesn't get the same credit as others because he hasn't had a "recent hit."

I love finding managers in such situations, as they're itching to show the world they should be held in the same regard as anyone else in their industry. Jeff Weiner was ready to show the world that when he left Yahoo! and found his way to LinkedIn (LNKD - Get Report). I believe Dan has such talent and we'll all get to see it over the next couple of years.

Chegg temporarily has a stigma associated with it because it's currently trading below its IPO price. In today's Twitterized society, we all want to make snap judgments. A stock or a person is a winner or a loser. There's never any middle ground. So when Chegg raised its IPO price before the actual IPO, people thought it was going to be a winner. When the stock immediately traded below that price, it was deemed a loser.

Selling begot more selling, and the stock dropped from $10 to $9, to $8 -- and eventually into the $7 range. The price action had nothing to do with the value of the underlying operating business. It was all about traders' perceptions of where the price was heading in the next 24 hours. As a result, in my view, it got oversold and this is always a great longer-term entry to a stock. Think Groupon (GRPN - Get Report) at $2.50 a year ago, or Zynga (ZNGA) in the $2-range at the same time.

Chegg is the leading platform connecting college students to people wanting to reach them. There's been a lot of focus on the competition Chegg could face. But it's the leading platform that's been built to date to reach this important demo and there's not really a number-two player anywhere close. So, yes, there could be competition, just like Netflix (NFLX - Get Report) could face a lot of competition in the future. Yet, we tend to see leading platforms accelerating their leadership position over time. More often than not they never see some invisible competitor come out of the shadows to overtake them.

People don't like Chegg's textbook business. I get it. This is seen as low margin; tying up a lot of Chegg's capital, and not the sexy pure-digital revenue play. From the $250 million in trailing twelve month revenues, $200 million of that comes from textbooks. However, investors' over-focus on this business is creating - in my view - a screaming buy in the online space.

Chegg knows this textbook business is going away, but chooses to stay in it because of two reasons -- it' profitable for the moment and its great marketing for the Chegg brand on college campuses. Let's say the textbook revenue is worth nothing in the Chegg valuation. In looking only at Chegg's digital revenues, they were $50 million in the last 12 months. Within the next year, I think there's a decent chance that could get doubled -- that's a whopping $100 million in digital revenues. Let's only assign value to that and say that business should get a Yelp-like YELP 30x multiple. That's a company worth $3 billion vs. the current $600 million enterprise value for Chegg. That's a bargain.

Chegg reminds me of how soured investors were when Netflix was transitioning from its old Qwikster DVD model to streaming. That negativity created a huge opportunity for investors who got in when the stock was $50. People just weren't willing to give Netflix credit for their new streaming business until they saw proof. So, instead of buying at $50, those skeptics had to wait until it was trading up to $350.

We'll see if the price action of Chegg moves up that high when they prove out the model. For now though, I'm willing to bet on Dan and his team that they will be able to deliver a lot of value in 2014. I'm on the bus now.

At the time of publication, Jackson was long GRPN and YELP.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Eric Jackson is founder and Managing Member of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. In January 2007, Jackson started the world's first Internet-based campaign to increase shareholder value at Yahoo!, leading to a change in CEOs in 2007. He also spoke out in favor of Yahoo!'s accepting Microsoft's buyout offer in 2008. Global Proxy Watch named Jackson as one of its 10 "Stars" who positively influenced international corporate governance and shareowner value in 2007.

Prior to founding Ironfire Capital, Jackson was President and CEO of Jackson Leadership Systems, Inc., a leadership, strategy, and governance consulting firm. He completed his Ph.D. in the Management Department at the Columbia University Graduate School of Business in New York, with a specialization in Strategic Management and Corporate Governance, and holds a B.A. from McGill University.

He was previously Vice President of Strategy and Business Development at VoiceGenie Technologies, a software firm now owned by Alcatel-Lucent. In 2004, Jackson founded the Young Patrons' Circle at the Royal Ontario Museum in Toronto, which is now the second-largest social and philanthropic group of its kind in North America, raising $500,000 annually for the museum. You can also email Ericat Dr.eric.jackson@me.com.

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