Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.
The Bull Thesis For Chegg
With Our Proprietary Sum Of The Parts Valuation
Why Would I Invest In A Textbook Rental and Sale...
Disclaimer
• The analyses and conclusions of Diamond Technology Management, an unregistered
investment advisor, contained ...
Business Overview
• Chegg is the leading student-first connected learning platform,
empowering students to take control of...
Chegg Has Been Ostracized By Investors
$12.50 Initial
Public Offering
At Current Prices The Stock Looks Like An Appealing ...
Why CHGG Is Our High Conviction Long
• Chegg is transitioning away from the textbook rental and sale business to be a
youn...
U.S. Education Market
Huge And Expanding Market $1 Trillion Dollar Market
Source: National Associate Of College Stores
Sou...
Chegg Well Positioned Within The Market
• Provides access to over 70,000 internship opportunities through their co-
brande...
http://www.cnbc.com/id/100391877
"When we took over the business three years
ago, it was clear that print textbooks and th...
Chegg FY 2013 Earnings Call
“Student have shown great interest in our new digital learning services and from us and our
pa...
But Chegg Is A Textbook Business
Why is Chegg talking about careers? Who else is in the career sector?
Linkedin Stock Pric...
Chegg Is Highly Motivated To Grow Career Offerings
Source: http://www.chegg.com/app-preview/internships
“So today, what we...
What If Chegg Became Young Linkedin
Source: Linkedin 10-K Filings
Additional revenue stream Chegg may develop as
builds “S...
Premium Membership Revenue Stream
To apply a numerical context to our argument, we have modelled one of
Linkedin’s revenue...
History Of Relevant Acquisitions
• Acquisition of Cramster (1 million users at acquisition) facilitating
expansion into Ch...
Many Potential Acquisition Opportunities
Rosenweig recently invested in
themuse personally. Career
profiling.
http://techc...
Sell Side Consensus
Sell-side projections offer meaningful
upside from current levels with no price
target below current m...
Non-Print Digital Stand Alone Valuation
• The non-print business grew its revenue 86% over the past year. If Chegg was
ent...
Non-Print And Digital Support Current Stock Price
(values in thousands)
2011 2012 2013 2014 2015 2016 2017 2018
Non-print ...
Print Valuation
(values in thousands)
2011 2012 2013 2014 2015 2016 2017 2018
Print Revenue 160,392$ 185,169$ 203,077$ 225...
Advertising As Revenue Stream
Chegg has ability to offer more relevant advertisements
than other advertising based busines...
Short Thesis
• Non-print growth is lower than expected. Zinch and CheggStudy are
relatively new offerings and there is unc...
Major Risk Factors
• Limited operating history makes it difficult to evaluate current
business and future prospects
• Hist...
Upcoming SlideShare
Loading in …5
×

Chegg Sum Of The Parts Valuation Yields Substantial Upside

924 views

Published on

Detailed investment analysis of Chegg

Published in: Economy & Finance
  • Be the first to comment

  • Be the first to like this

Chegg Sum Of The Parts Valuation Yields Substantial Upside

  1. 1. The Bull Thesis For Chegg With Our Proprietary Sum Of The Parts Valuation Why Would I Invest In A Textbook Rental and Sale Company?
  2. 2. Disclaimer • The analyses and conclusions of Diamond Technology Management, an unregistered investment advisor, contained in this presentation are based on publicly available information. • Diamond Technology Management recognizes that there may be confidential information in the possession of the companies discussed in the presentation that could lead these companies to disagree with our analysis. • Diamond Technology Management has a long position in Chegg. It is possible that there will be developments in the future that cause Diamond Technology Management to change its position regarding the companies discussed in this presentation. Diamond Technology Management may buy, sell, cover or otherwise change the form of its investment regarding such companies for any reason. Diamond Technology Management hereby disclaims any duty to provide any updates or changes to the analyses contained here including, without limitation, the manner or type of any Diamond Technology Management Investment. No representations, express or implied, are made as to the accuracy or completeness of such statements, estimates or projections or with respect to any other materials herein. Actual results may vary materially from the estimates and projected results contained herein. This presentation and the information contained herein is not a recommendation or solicitation to buy or sell any securities. Individuals should conduct their own analysis prior to investing.
  3. 3. Business Overview • Chegg is the leading student-first connected learning platform, empowering students to take control of their education to save time, save money and get smarter. Revenue streams include: • Print Textbooks • eTextbooks • Chegg Study • Enrollment marketing services • Internships • Brand Advertising
  4. 4. Chegg Has Been Ostracized By Investors $12.50 Initial Public Offering At Current Prices The Stock Looks Like An Appealing Turnaround Investment $6.93: Closing Price(3/28/14)
  5. 5. Why CHGG Is Our High Conviction Long • Chegg is transitioning away from the textbook rental and sale business to be a young professional educational and career network • Growth and margin profile are significantly higher in non-print segments • Valuation of a 100% non-print business justifies current stock price with investors receiving a high revenue print business they are not paying for • Chegg has a history of making relevant acquisitions and has indicated interest in continuing to do so. Acquisitions will expedite the transition to an entirely digital business. • Linkedin offers relevant data as to what Chegg could eventually become in its target market and returns investors could realize • Sum of the parts valuation yields a $11 per share value consistent with where bankers priced initial public offering • As a conservative investor we are looking for share price to return to $9 per share
  6. 6. U.S. Education Market Huge And Expanding Market $1 Trillion Dollar Market Source: National Associate Of College Stores Source: GSV Estimates; Education Sector 2012 Chegg Only Needs .1% market share to become billion dollar company and double its market capitalization
  7. 7. Chegg Well Positioned Within The Market • Provides access to over 70,000 internship opportunities through their co- branded Internship service • During 2013, students completed 3.8 million transactions on Chegg platform, and Chegg rented or sold over 5.5 million print textbooks and eTextbooks • In 2013, approximately 464,000 students subscribed to Chegg’s proprietary Chegg Study service. • Received 7.6 million inquiries from students using our College Admissions and Scholarship Services • During 2013, nearly 7.0 million students used Chegg’s platform and approximately 1.3 million students used their mobile applications Chegg Has Nearly 30% of all U.S. college students somewhere within their platform
  8. 8. http://www.cnbc.com/id/100391877 "When we took over the business three years ago, it was clear that print textbooks and the rental model wouldn't be around forever, as the world goes increasingly digital," Dan Rosenweig Chegg CEO 2013 CNBC Interview The Transition
  9. 9. Chegg FY 2013 Earnings Call “Student have shown great interest in our new digital learning services and from us and our partners. So you can expect us to launch more of them in 2014. The success of Chegg study which grew 66% year-over-year and has climbed to 464,000 paying subscribers shows the opportunity we have to offer more digital services” “Brand partnerships has seen significant growth. We are seeing growth in probably different ways. More overall advertisers, we have over 90% renewal rates and on average, each advertiser is right with us, increases the amount of money they spent on their new campaigns” “So you can imagine over time the opportunity for Chegg to continue to provide services and now into the career area. So long term, we think it’s a very big money maker for us” Dan Rosenweig Chegg CEO FY 2013 Earnings Call
  10. 10. But Chegg Is A Textbook Business Why is Chegg talking about careers? Who else is in the career sector? Linkedin Stock Price Since IPO
  11. 11. Chegg Is Highly Motivated To Grow Career Offerings Source: http://www.chegg.com/app-preview/internships “So today, what we have is expressions that where students want to go to school, what their gender is, what their age is, what their majors are. Now that we have the opportunity to understand what they are interested in do professionally, that opens up whole new opportunities in the categories of skills and ultimately careers and so our next step in data collection will be around that area.” Source: Dan Rosenweig Q4 2013 Earnings Call
  12. 12. What If Chegg Became Young Linkedin Source: Linkedin 10-K Filings Additional revenue stream Chegg may develop as builds “Student Graph”
  13. 13. Premium Membership Revenue Stream To apply a numerical context to our argument, we have modelled one of Linkedin’s revenue streams being applied by Chegg. Offering a premium job applicant membership would yield a strong revenue stream once Chegg sourced more employers to its platform(Could occur in 2016) 2013 2014 2015 2016 2017 2018 Number of Active Users 7,000,000 7,500,000 8,000,000 9,000,000 10,000,000 11,000,000 Percent Of Users Converting To Premium 0.00% 0.00% 0.00% 1.00% 2.00% 4.00% Number of Premium Users - - - 90,000 200,000 440,000 Premium Membership Price(Monthly) $9.99 $9.99 $9.99 $9.99 $9.99 $9.99 Revenue From Premium Stream $0 $0 $0 $10,789,200 $23,976,000 $52,747,200 Cost of Sales(CPA) -$ -$ -$ 135,000$ 300,000$ 660,000$ Technology Expenses(Per User) -$ -$ -$ 90,000$ 200,000$ 440,000$ Net Profit $0 $0 $0 $10,564,200 $23,476,000 $51,647,200 Outstanding Shares 20,902,000 85,000,000 88,000,000 90,000,000 93,000,000 96,000,000 EPS 0.00 0.00 0.00 0.12 0.25 0.54 P/E 50 Per Share Value 27 Chegg can add substantial share value through its transition to careers. The illustrative example of adding a premium membership at $9.99(Substantial Discount to Linkedin) shows it adds $27 per share of value
  14. 14. History Of Relevant Acquisitions • Acquisition of Cramster (1 million users at acquisition) facilitating expansion into Chegg study offering • Acquisition of Zinch(acquisition of Zinch, with over 3.5 million members, $1.9 billion in scholarships and over 5,000 school profiles, will significantly expand Chegg’s customer base and its social education platform) • Company is well capitalized to execute acquisition in FY 2014. As of December 31, 2013, Chegg’s principal sources of liquidity were cash, cash equivalents and investments totaling $138.3 million, which were held for working capital purposes. Chegg’s cash equivalents and investments are composed primarily of commercial paper, corporate securities and money market funds. Chegg has $50.0 million available for draw down under their revolving credit facility with an accordion feature subject to certain financial criteria that would allow them to draw down to $75.0 million in total, which expires in August 2016.
  15. 15. Many Potential Acquisition Opportunities Rosenweig recently invested in themuse personally. Career profiling. http://techcrunch.com/2014/02/ 04/tyra-banks-and-more-put-a- million-in-the-muse/ We believe management is actively searching for acquisition targets with their sizable cash balance. Acquisitions within the young recruiting space would align with Chegg’s recent expansion into internships Runs challenges for companies to screen college applicants, already has revenue stream. Strong technical development team. $650,000 unique student visitors a month
  16. 16. Sell Side Consensus Sell-side projections offer meaningful upside from current levels with no price target below current market price Firm Price Target Valuation Method Utilized Upside(Downside) From Current Price J.P. Morgan 13.00$ DCF 88% Bank Of America 8.00$ EV/EBITDA Multiple 15% Jefferies 14.00$ N/A 102% Raymond James 12.00$ N/A 73% BMO 11.00$ N/A 59% Average 11.60$ 67% Diamond Technology Management $9.00 Blended 30% Closing Price As Of 03/28/14: $6.93 6.93
  17. 17. Non-Print Digital Stand Alone Valuation • The non-print business grew its revenue 86% over the past year. If Chegg was entirely a non-print and digital offering(impossible currently because the textbooks are instrumental in driving growth of digital offerings) what would the business be worth per share? • Assumptions in our model include: 1-Digital Cost of Revenue Derived from Chegg’s historical financials 2-Technology and development estimated from Salesforce.com(CRM) a subscription company’s financials, given Chegg’s current digital revenue is subscription based. 3-Sales and Marketing estimated from Linkedin (LNKD) financials given consumer focus of Chegg and its transition to careers 4-General and administrative estimated utilizing Chegg’s historical rates 5- Utilize a 12% WACC, consistent with discount rates utilized for other high growth internet businesses 6- 7% profit margin in 2018 is in line with where Linkedin’s margins are anticipated to settle
  18. 18. Non-Print And Digital Support Current Stock Price (values in thousands) 2011 2012 2013 2014 2015 2016 2017 2018 Non-print products and digital services 11,626$ 28,165$ 52,498$ 86,000$ 130,000$ 190,000$ 247,000$ 321,100$ y/y revenue growth 142.26% 86.39% 63.82% 51.16% 46.15% 30.00% 30.00% Cost of Revenue* 4,069$ 9,858$ 18,374$ 29,240$ 42,900$ 58,900$ 74,100$ 86,697$ % of Sales 35% 35% 35% 34% 33% 31% 30% 27% Gross Profit 7,557$ 18,307$ 34,124$ 56,760$ 87,100$ 131,100$ 172,900$ 234,403$ % of Sales 65% 65% 65% 66% 67% 69% 70% 73% Technology and development** 1,860$ 4,506$ 8,400$ 13,760$ 20,800$ 30,400$ 39,520$ 51,376$ % of Sales 16% 16% 16% 16% 16% 16% 16% 16% Sales and marketing*** 3,953$ 9,576$ 17,849$ 29,240$ 44,200$ 64,600$ 83,980$ 109,174$ % of Sales 34% 34% 34% 34% 34% 34% 34% 34% General and administrative $1,860.16 4,506$ 8,400$ 13,760$ 20,800$ 30,400$ 39,520$ 51,376$ % of Sales 16% 16% 16% 16% 16% 16% 16% 16% Operating Income -$117 -$282 -$525 -$1 $1,300 $5,700 $9,880 $22,477 interest and other expense,net (1,703)$ (3,759)$ (4,177)$ -$ -$ -$ -$ -$ Pre-Tax Earnings -$1,820 -$4,041 -$4,702 -$1 $1,300 $5,700 $9,880 $22,477 Provision(benefit) for income taxes -$ -$ -$ -$ -$ -$ -$ -$ Net Loss -$1,820 -$4,041 -$4,702 -$1 $1,300 $5,700 $9,880 $22,477 Profit Margin -15.7% -14.3% -9.0% 0.0% 1.0% 3.0% 4.0% 7.0% Weighted Shares Outstanding(Basic) 8,453 11,183 20,902 85,000 88,000 90,000 93,000 96,000 EPS -$0.22 -$0.36 -$0.22 $0.00 $0.01 $0.06 $0.11 $0.23 12$ 7$ Non-print products and digital services Historical as of FYE December 31 Projected as of FYE December 31 $7 per share value of non-print and digital alone justifies current share price. Investors are not paying to own the print business at current levels.
  19. 19. Print Valuation (values in thousands) 2011 2012 2013 2014 2015 2016 2017 2018 Print Revenue 160,392$ 185,169$ 203,077$ 225,000$ 260,000$ 300,000$ 340,000$ 365,000$ y/y revenue growth 15.45% 9.67% 10.80% 15.56% 15.38% 13.33% 7.35% Cost of Revenue* 126,710$ 146,284$ 160,431$ 175,500$ 200,200$ 228,000$ 255,000$ 270,100$ % of Sales 79% 79% 79% 78% 77% 76% 75% 74% Gross Profit 33,682$ 38,885$ 42,646$ 49,500$ 59,800$ 72,000$ 85,000$ 94,900$ % of Sales 21% 21% 21% 22% 23% 24% 25% 26% Technology and development** 12,831$ 14,814$ 16,246$ 18,000$ 20,800$ 24,000$ 27,200$ 29,200$ % of Sales 8% 8% 8% 8% 8% 8% 8% 8% Sales and marketing*** 8,020$ 9,258$ 10,154$ 11,250$ 13,000$ 15,000$ 17,000$ 18,250$ % of Sales 5% 5% 5% 5% 5% 5% 5% 5% General and administrative $22,454.88 25,924$ 28,431$ 31,500$ 36,400$ 42,000$ 47,600$ 51,100$ % of Sales 14% 14% 14% 14% 14% 14% 14% 14% Operating Income -$9,624 -$11,110 -$12,185 -$11,250 -$10,400 -$9,000 -$6,800 -$3,650 interest and other expense,net (1,703)$ (3,759)$ (4,177)$ -$ -$ -$ -$ -$ Pre-Tax Earnings -$11,327 -$14,869 -$16,362 -$11,250 -$10,400 -$9,000 -$6,800 -$3,650 Provision(benefit) for income taxes -$ -$ -$ -$ -$ -$ -$ -$ Net Loss -$11,327 -$14,869 -$16,362 -$11,250 -$10,400 -$9,000 -$6,800 -$3,650 Profit Margin -7.1% -8.0% -8.1% -5.0% -4.0% -3.0% -2.0% -1.0% Shares Outstanding 8,453 11,183 20,902 85,000 88,000 90,000 93,000 96,000 EPS -1.34 -1.33 -0.78 -0.13 -0.12 -0.10 -0.07 -0.04 Print Valuation Historical as of FYE December 31 Projected as of FYE December 31 EV/Revenue 1X Enterprise Value 225,000$ Cash and Equivalents 76,864$ Equity Value 301,864$ Shares Outstanding FY 14 85,000 4$ Utilizing a 1X revenue multiple (the low end of Amazon’s range) on 2014 revenue yields a per share value of $4 for the lower growth print business
  20. 20. Advertising As Revenue Stream Chegg has ability to offer more relevant advertisements than other advertising based businesses like Facebook Actual Product Students Need, with free trial Although I need food and insurance many of Facebook ads are more general, obtrusive, and less pragmatic
  21. 21. Short Thesis • Non-print growth is lower than expected. Zinch and CheggStudy are relatively new offerings and there is uncertainty about what new services Chegg can offer. • Textbook sale and rental is highly competitive and Amazon has started a pricing war. Currently Print textbooks are a majority of Chegg’s revenue. We feel that given the multi-billion dollar market size, strong management team, and strong balance sheet Chegg has amassed that Chegg will be able to grow its non-print offerings through internal development and acquisitions, making within the longer time horizon the physical textbook aspect of the business irrelevant
  22. 22. Major Risk Factors • Limited operating history makes it difficult to evaluate current business and future prospects • History of losses and may not achieve or sustain profitability into the future • Business model is uncertain in both print and non-print segments • Linkedin is a strong competitor and has executed very well within career sector

×