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The Ratings Game: Chegg’s ‘déjà vu’ outlook sends stock plunging as several onetime bulls jump ship

Chegg Inc. acknowledged that more people are focused on “earning over learning” in the current macroeconomic environment, a seesawing view on its business trends that sent shares diving and prompted several bullish analysts to jump ship.

Shares of Chegg CHGG, -28.26% were off nearly 30% in afternoon trading Tuesday after the online-education company slashed its outlook in the face of a more challenging backdrop than it had seen just three months back. The company noted that a combination of higher wages and increased living expenses drove students to enroll in fewer courses, choose ones with less demanding workloads, or delay schooling.

See more: Chegg stock plummets toward lowest price in 4 years after annual forecast chopped

The report struck Piper Sandler analyst Arvind Ramnani as a bit of “déjà vu.” About six months back, the company fell short with its holiday-quarter forecast as it cited a slowdown in the education market, but the company signaled improving trends when it updated investors in February.

“Commentary and guidance cut this quarter thus feels like déjà vu, and management indicated that there is diminished visibility into these trends stabilizing or improving,” he wrote. “If Fall 2022 enrollments and student behavior do not improve, we believe this ‘transition year’ could bleed into next year.”

Ramnani cut his rating on Chegg shares to neutral from overweight, writing that investors “will need to see a steady trend of beat/raises and enrollment stability to gain confidence in the stock.”

He also noted that Chegg’s warning suggests fellow online-education companies Udemy Inc. UDMY, -2.85% and 2U Inc. TWOU, -11.78% could be witnessing “similar headwinds.” Udemy’s stock was off 4% on Tuesday while Udemy’s was down about 13%.

William Blair’s Stephen Sheldon also downgraded Chegg shares, writing of the “disappointing” outlook and management’s “minimal visibility” into business trends.

“We continue to believe there could be a wide range of financial outcomes over the next few years, but are much less optimistic about the growth outlook from here with growing questions about the factors driving the slowdown,” he wrote.

Sheldon lowered his rating to market perform from outperform.

“There are clearly industry headwinds that are working against Chegg (which should be temporary), and Chegg also faces continued tough comparisons, but with numerous growth drivers (bundle adoption, international traction, high demand for skills-based learning, etc.), we are surprised that Chegg could not support at least some organic top-line growth over the near term,” he continued.

Of the 16 analysts tracked by FactSet who cover Chegg’s stock, just three now rate it a buy. Twelve have hold ratings, and one is at sell.

Jefferies analyst Brent Thill acknowledged that Chegg’s outlook “suggests worse grades are coming,” but he was among the few who kept the faith in the wake of the latest report.

“Bears will point to a challenging subscriber growth outlook in the U.S., but we highlight that management called out positive U.S. [revenue] growth in Q1,” Thill wrote. “We continue to view the slowdown in growth as a broad industry trend, and do not believe [Chegg] is being adversely impacted by competitive factors.”

Thill also highlighted Chegg’s commentary on its strong retention rates and expressed optimism that the company eventually would be able to increase prices in the U.S. “with minimal churn.”

He kept a buy rating on the stock but lowered his price target to $30 from $55.

Shares of Chegg have plunged nearly 80% over the past 12 months, as the S&P 500 SPX, +0.78% is near flat.

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