Citi: Chegg's Upside Is Priced In

While Chegg, Inc. CHGG could see subscriber growth due to an expanding customer base and continued spending on content, the stock's 36-percent share price gain since January has limited further upside, according to Citi. 

The Analyst

Thomas Singlehurst of Citi downgraded Chegg from Buy to Neutral and raised the price target form $20.50 to $22.70.

The Thesis

Confidence in Chegg’s medium-term growth prospects remains strong thanks to addressable market growth that's driven by high content spending, Singlehurst said in a Tuesday note.

Chegg’s addressable market — consisting largely of American undergraduate students — is estimated at around 10 million, yielding 2.2 million paying subscribers, the analyst said. 

Chegg is planning test prep and self-guided mathematics services that could help the company capture additional subscribers among high school students, a market of 16 million, Singlehurst said. 

Other opportunities among international students and even working professionals could grow Chegg’s addressable market to over 30 million, he said. 

While Chegg’s capex margin, at roughly 10 percent of sales,  is higher than its peers, the spending is largely allocated to content, a key driver of subscriber growth, according to Citi. 

These drivers are likely already reflected in Chegg’s share price, meaning there is limited upside even when higher forecasts are factored in, Singlehurst said.

“Given the recent move in share price, much of this potential appears to have been discounted.”

Price Action

Chegg shares were down 2 percent at $21.82 at the time of publication Tuesday afternoon. 

Related Links: 

Benzinga's Top Upgrades, Downgrades For March 13, 2018 

Morgan Stanley Gives Chegg's Business Top Grades, But Not The Stock