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JPMorgan sets Chegg stock at Neutral with $9 target

EditorAhmed Abdulazez Abdulkadir
Published 03/11/2024, 06:56 AM
© Reuters.

On Monday, JPMorgan initiated coverage of Chegg Inc (NYSE:CHGG), an education technology company, with a Neutral rating and a price target of $9.00. The firm outlined Chegg's main focus areas for 2024, which include returning to global new account growth, maintaining strong margins and cash flow, introducing next-phase GenAI-enhanced services, and capitalizing on momentum in Skills for continued growth.

Chegg's progress in its GenAI transformation is evident, with the company rolling out proprietary Large Language Models (LLMs) and conversational GenAI tools aimed at improving user experience and driving deeper engagement and conversions. Despite the competitive risks posed by GenAI/LLMs, Chegg's vast proprietary database and subject matter experts are seen as significant differentiators.

The company reported a 6% year-over-year decline in Annual Subscription Services Subscribers and a 7% drop in Total Revenue for 2023. Chegg has implemented promotional pricing in the U.S. since mid-January and is banking on enhancements in GenAI/LLM to boost conversions across the country. The combination of these strategies, along with Study Pack, international expansion, Skills, and Busuu, is expected to help Chegg recover subscriber and revenue growth, although the timing remains uncertain.

Chegg is also focusing on profitability by reallocating resources towards AI and reducing expenses in other areas. The company's strong Adjusted EBITDA profile, with $222.4 million and a 31.0% margin in 2023, along with Free Cash Flow (FCF) generation of $172.9 million, reflects its solid financial health.

JPMorgan anticipates that a return to revenue growth, increased cost discipline, and GenAI/LLM efficiencies will contribute to incremental operating leverage over time.

The price target set by JPMorgan for December 2024 is based on approximately 3.5 times Chegg's estimated 2025 EBITDA of $217 million, which correlates to about 4.5 times the projected 2025 FCF of $171 million.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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