By Jeremy C. Owens
Online education specialist Chegg Inc.’s business is taking a hit from what the chief executive said was a decline in college enrollment and students’ effort, and Wall Street wiped away nearly half the online-education company’s valuation as a result.
“In late September, it became clear to us that the education industry is experiencing a slowdown that we believe is temporary and is a direct result of the COVID-19 pandemic,” Chegg /zigman2/quotes/205655041/composite CHGG -0.94% Chief Executive Dan Rosensweig said in a Monday afternoon statement that was included with quarterly earnings information that showed a surprising decline in subscribers and big miss on the holiday sales forecast.
Shares fell 45% Tuesday morning, driving Chegg’s market capitalization from more than $9 billion as of Monday’s close to less than $5 billion at intraday prices. At least a half-dozen analysts downgraded the stock in response to the report, more than a third of the 17 analysts who cover the company, according to FactSet.
Chegg was more specific about the issues in an investor presentation prepared for Monday’s report, saying “some effects of the COVID-19 pandemic have begun to negatively impact enrollments, student course-loads and quantity of graded assignments,” and Rosensweig also offered more color in a conference call later in the afternoon.
“A combination of variants, increased employment opportunities, and compensation, along with fatigue, have all led to significantly fewer enrollments than expected this semester. And those students who have enrolled are taking fewer and less rigorous classes and are receiving less graded assignments,” he said in a prepared statement. “We believe this is a post-pandemic impact that will affect this school year but is not sustainable for higher education long term.”
Preliminary data from the National Student Clearinghouse backed up Rosensweig’s enrollment statements. Last week, the educational-data provider said that undergraduate enrollment as of Sept. 23 had declined 3.2% in fall 2021, similar to a 3.4% decline in fall 2020, with much larger drops this year at public four-year colleges (a decline of 2.8% vs. 0.8% last year) and private, for-profit four-year colleges (12.7% vs. 0.3%).
“This is a post-COVID hangover of mental exhaustion, an opportunity to earn more money, a reassessing of their lives, not unlike what you hear going on in the corporate workplace,” Rosensweig said in response to the first analyst question in Mondays’ call. “It just all came together at one time. We didn’t see it happening and it happened.”
The analyst followed up with the CEO to ask if the increasing costs of college are dissuading students from enrolling, which would make this less temporary than Rosensweig was implying.
“What you described I think is accurate, but that’s not what’s happening now. What’s happening now is just millions of students just didn’t go back. I mean, just — even in community colleges alone,” he said, predicting that the trend could reverse with the beginning of next school year, but admitting it was just a guess.
“I would say the duration, we just frankly don’t know,” he said in a later response. “We’re 30 days into seeing this and it’s not that it’s 30 days, to 60 days or 90 days. It’s just this semester. It could be limited to this semester. We could see a whole bunch of people come back in January that just took all the money that they could for the Christmas holidays because Starbucks /zigman2/quotes/207508890/composite SBUX -0.27% is tripling their salaries.”
The earnings report showed that Chegg’s third-quarter revenue came in slightly lighter than expectations at $171.9 million, but the bigger miss came in Chegg’s sales forecast, which called for holiday-season — or finals/midterms-season, in Chegg’s case — sales of $194 million to $196 million. Analysts on average expected third-quarter sales of $173.9 million and fourth-quarter revenue of $241.7 million, according to FactSet.
The company said it had just 4.4 million subscribers, a steep and unexpected decline from the previous quarter’s 4.86 million; analysts on average had expected 4.85 million, according to FactSet.
Online education and other support has experienced a huge uptick in the COVID-19 pandemic, as schools closed and students who felt left behind sought additional resources. Education companies have responded by rushing to Wall Street, which welcomed Udemy Inc.’s initial public offering last week and Coursera Inc.’s IPO earlier in the year.
Coursera IPO: 5 things to know about the online-education company
Chegg reported third-quarter profit of $6.7 million, or 5 cents a share; after adjusting for stock-based compensation and other effects, the company reported earnings of 20 cents a share. Analysts on average expected adjusted earnings of 19 cents a share.
“While headwinds such as lower than expected higher-ed enrollment are not directionally surprising, we think investors may be caught off guard by the slowing usage of the platform, which exacerbates early enrollment decline projections in the low single digit range,” wrote Raymond James analysts while downgrading the stock from outperform to market perform Tuesday morning.
With the wave of downgrades Tuesday morning, analysts are now evenly split between buying and holding Chegg shares, with eight analysts rating the stock a buy and eight calling it the equivalent of a hold, with just one sell rating. Before the earnings report, 14 of the 17 Chegg analysts that FactSet tracks rated the stock the equivalent of a buy.
Chegg shares had already taken a hit, falling 29.2% in the past three months after an astounding run-up during the COVID-19 pandemic that took shares from less than $30 to more than $110 at their peak earlier this year. Chegg shares closed with a 5.6% gain ahead in Monday’s regular session at $62.76, then dove to less than $46 in after-hours trading; shares have not traded for less than $50 in any regular session since May 2020.
Other education stocks also declined in Tuesday trading , as 2U Inc. /zigman2/quotes/201921395/composite TWOU -3.98% dropped more than 8%, and Stride Inc. /zigman2/quotes/205813628/composite LRN +0.56% , Coursera /zigman2/quotes/225683790/composite COUR -2.55% and freshly public Udemy /zigman2/quotes/230552033/composite UDMY -5.89% declined more than 2%.
Clarification: This story previously had an incorrect figure for Chegg’s peak share price. It has been updated.