By Sam Boughedda
Chegg (NYSE:CHGG) was downgraded to Hold from Buy, with its price target removed by Needham & Company analysts on Wednesday.
Following the note, Chegg shares are down over 15%.
The analysts said in their research note on the stock that long-term initiatives limit the near-term growth upside.
"Our analysis of FY22 growth trends across Chegg Services subs, ARPU, and Busuu suggests the FY23 consensus estimate of 9.2% y/y Chegg Services rev growth is too high," the analysts said. "When removing the inorganic contribution of Busuu, Chegg Services revenue is on pace to grow approx. 3.3% in FY22."
As a result, Needham sees "limited opportunity for acceleration" due to the slowing growth in domestic subs alongside expectations that ARPU will be pressured by international price localization that will bring new subs on at a 40% to 60% discount.
"We also see limited upside for Busuu given its FY22 underperformance and lack of brand awareness among the core Chegg Study base. While we foresee multiple levers for EBITDA margin expansion, we believe incremental investment to reaccelerate growth will limit NT expansion opportunities," the analysts added.