On Tuesday, Morgan Stanley (NYSE:MS) significantly changed its rating on Chegg (NYSE:CHGG) stock, moving from Underweight to Equalweight. Accompanying this upgrade, the firm also adjusted its price target to $3.25, down from the previous target of $6.50.
The adjustment in the investment firm's view is based on expectations of Chegg's upcoming financial results, which are anticipated to align with the negative outlook shared by the investment community.
Morgan Stanley has also revised its revenue and EBITDA forecasts for Chegg downward, indicating that sell-side estimates still need to be reduced further.
Despite the downward revision in revenue and EBITDA expectations, the rationale behind the upgrade to an Equalweight rating lies in the valuation of Chegg's stock. At a price of 2 times EBITDA, Morgan Stanley believes that the risk/reward profile for Chegg has become more balanced. This is also supported by the company's prospects of generating solid free cash flow in the future.
The analyst from Morgan Stanley highlighted the firm's position, stating, "We expect negative results relatively in line with negative buyside expectations. We significantly cut revenue and EBITDA forecasts, acknowledging sell-side estimates still need to move lower, but at 2x EBITDA and with solid FCF generation ahead, we see a more balanced risk/reward."
Investors and market watchers will be keeping an eye on how Chegg's financial performance unfolds in light of these revised expectations and the updated outlook from Morgan Stanley. The education technology company's ability to generate free cash flow will be a critical factor in determining whether the new risk/reward assessment holds true.
In other recent news, Chegg, a language learning provider, has introduced an AI-based feature called 'speaking practice' to aid learners in their conversational skills. Furthermore, Chegg has entered into a five-year agreement with Amazon (NASDAQ:AMZN) Web Services (AWS) to bolster its AI learning tools. This partnership is expected to enhance personalized learning experiences for students globally using AWS technologies.
In addition, Chegg has announced a significant restructuring plan, which includes a 23% reduction in its workforce. This move is projected to result in annual cost savings of $40 million to $50 million by 2025.
Chegg is also undergoing a leadership transition, with the current CEO moving to the Executive Chairman role and the Chief Operating Officer set to assume the CEO position.
The company reported a 7% year-over-year decline in revenue for Q1 2024, with earnings reported at $174 million. Analysts' outlooks on Chegg have been adjusted in light of these developments.
BMO Capital Markets maintained an Outperform rating, while Piper Sandler and Jefferies kept an Underweight rating. These are the recent developments in Chegg's strategy to optimize operations and improve performance in the long term.
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