On Tuesday, Morgan Stanley (NYSE:MS) analysts downgraded Chegg Inc . (NYSE:NYSE:CHGG) stock from Equal-weight to Underweight, adjusting the price target to $1.25, a decrease from the previous $2.00. The firm cited several reasons for the downgrade, including the stock's recent outperformance not aligning with the observed decline in web traffic and app downloads, consensus estimates that are considered too high, and aggressive Q4 subscription revenue guidance that doesn't match typical seasonality.
The analysts also expressed concerns about potential pressure on average revenue per user (ARPU), margin contraction due to declining revenues, and negative impacts on the top line from the company's restructuring and cost-saving initiatives. These factors had previously led to a downgrade to Underweight in November 2023.
In July 2024, Chegg's stock rating was upgraded to Equal-weight after analysts believed the negative outlook and challenging environment were reflected in the stock's valuation. They anticipated that reduced operating expenses and capital expenditures could allow Chegg to generate over $85 million in annual free cash flow, providing some valuation support.
However, the latest analysis suggests that the market has not fully accounted for the significant decrease in demand trends, particularly the impact of changes in the internet search experience.
The emergence of AI-generated content at the top of search results pages has effectively bypassed content sites like Chegg, leading to further deterioration in the company's outlook. This shift has prompted Morgan Stanley to revert Chegg's stock rating back to Underweight.
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