Chegg Struggles With Declining Traffic, Revenue Amid Increased Competition, Says Analyst

JPMorgan analyst Bryan M. Smilek reiterated a Neutral rating on the shares of Chegg Inc CHGG

The company struggles with both long-term challenges and increased competition, leading to a weaker-than-expected outlook for first-quarter, said the analyst.

Chegg revealed it is undergoing a strategic review and considering various options, including a potential acquisition, a go-private deal, or staying as an independent public company.

The first-quarter revenue forecast suggests a decline of 33%-35% year-over-year, with the company attributing the drop to competition from generative AI and large language models, particularly due to Google’s widespread rollout of AI-driven overviews.

In January, Chegg's global non-subscriber traffic plummeted by 49% compared to the previous year, while retention rates worsened during November and December.

Churn improved toward the end of December and has since stabilized in first quarter. Chegg believes the traffic decline is mainly due to Google's AI Overviews diverting users away from third-party websites, prompting Chegg to file a complaint against Google and its parent company, Alphabet Inc GOOGGOOGL.

The complaint alleges that Google forces Chegg to provide proprietary content for its search engine, misuses its monopoly power in search and benefits from Chegg's content without compensating it.

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Amid these challenges, Chegg is focused on stabilizing its business through product improvements, diversifying its marketing efforts, and growing its Enterprise/Busuu segment.

The company acknowledges rebuilding its subscriber base and improving top-of-funnel metrics will take time, noted the analyst.

The company is also working on cost reductions and expects to achieve $100 million to $120 million in annualized non-GAAP savings by 2025 from restructuring efforts.

Despite these pressures, Chegg is committed to balancing investments in growth, profitability, debt repayments and shareholder returns, including a $207.5 million buyback authorization.

Notably, Chegg's $358.6 million in 2025 convertible senior notes will mature on March 15. While industry challenges are expected to persist into 2025, Chegg is hopeful subscriber and revenue trends will stabilize later in the year and the company will manage expenses to preserve profitability.

In light of these difficulties, the analyst reduced 2025 and 2026 revenue estimates by approximately 15% and adjusted EBITDA by 50%-56%.

The company believes enhancing its products, expanding marketing efforts and driving enterprise growth will help revive subscriber and revenue growth, though the timeline for this recovery is uncertain, the analyst wrote.

CHGG Price Action: Chegg shares are trading lower by 28.85% at $1.11 at publication Tuesday.

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