On Tuesday, Jefferies issued a downgrade for the education technology company Chegg (NYSE:CHGG), changing its stock rating from Hold to Underperform. Accompanying this downgrade, the firm also reduced the price target for Chegg's shares from $7.00 to $4.00.
The decision for the downgrade followed Chegg's first-quarter earnings report and included second-quarter guidance that fell short of expectations. The guidance provided was 8% and 15% below the consensus at the midpoint, prompting concerns over the company's growth prospects.
Jefferies cited the increasing availability of free AI tools as a significant factor behind the downgrade, suggesting that these might serve as appealing alternatives to Chegg's paid subscription services. This competitive pressure could potentially hinder Chegg's ability to achieve sustainable growth.
Furthermore, Jefferies adjusted their financial forecasts for Chegg, projecting revenue and adjusted EBITDA for the fiscal year 2025 to be 11% and 12% below the consensus, respectively. The firm expects revenue declines in 2025, which influenced the setting of the new price target. The $4.00 price target is based on approximately 1.5 times Jefferies' estimated fiscal year 2025 EBITDA for Chegg.
InvestingPro Insights
As Chegg (NYSE:CHGG) navigates the challenging landscape highlighted by Jefferies, real-time data from InvestingPro provides additional context for investors. Chegg's market capitalization stands at $732.32 million, reflecting the market's current valuation of the company. Despite a recent price target reduction, Chegg's gross profit margin remains robust at 73.8% over the last twelve months as of Q1 2023, underlining the company's ability to maintain profitability on its services. Furthermore, analysts are optimistic about Chegg's net income growth this year, reinforcing the potential for a financial turnaround.
InvestingPro Tips suggest that while Chegg trades at a high earnings multiple with a P/E ratio of 45.38, the valuation implies a strong free cash flow yield, which could be attractive to investors seeking companies with the potential for cash generation. Additionally, Chegg is predicted to be profitable this year, providing a silver lining amidst concerns over its growth trajectory.
For those interested in a deeper dive into Chegg's financials and strategic positioning, InvestingPro offers a variety of additional insights. There are currently 9 more InvestingPro Tips available for Chegg, which can be accessed by visiting https://www.investing.com/pro/CHGG. To enrich your investing strategy with these insights, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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