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.
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) 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) 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). 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) 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) 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.