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Is Chegg (CHGG) Poised for a Beat This Earnings Season?

Zacks

Chegg, Inc. CHGG is set to report fourth-quarter 2017 results on Feb 12, after market close.

Last quarter, the company reported adjusted earnings of a penny, compared with the Zacks Consensus Estimate of a breakeven. Moreover, Chegg surpassed expectations in two of the last four quarters, the average being 46.97%.

Let’s see how things are shaping up prior to this announcement.

Factors at Play

The rising popularity of online, on-demand human help for different courses at high school and college levels bode well for Chegg. The company’s strategy of delivering high-quality and low-cost educational services is also a positive.

Chegg’s revenues comprise two revenue streams — Chegg Services and Required Materials. The company’s strategic investments in Chegg Services are expected to drive Q4 revenues. Chegg projects Chegg Services revenues in the band of $58 million to $59 million, higher than $44.3 million reported in the year-ago quarter. The Zacks Consensus Estimate for revenues is pegged at $59 million, implying a 33.2% year-over-year increase.

Moreover, investments in Chegg Study (part of Chegg Services) have led to record results in subscribers, engagement and renewals. This has led to an impressive 63% year-over-year growth in engagement, resulting in 74 million content views in the third quarter. The trend is expected to continue in the to-be-reported quarter.

However, revenues at Required Materials are expected to decline in the quarter. The Zacks Consensus Estimate for Required Materials revenues is pegged at $11.7 million, implying a 37.8% year-over-year increase.

The company anticipates fourth quarter gross margin between 69% and 71%, higher than 67% in the prior-year quarter, while adjusted EBITDA is expected at around $19-$20 million, compared with $13.9 million posted in the fourth quarter of 2016.

Overall, for the fourth quarter, Chegg projects total revenues in the $70-$71 million band, compared with $63.1 million in the prior-year quarter. Also, the Zacks Consensus Estimate for revenues is pegged at $70.5 million, implying an 11.8% increase. Also, earnings are expected at 13 cents, reflecting a 30% improvement, per the consensus estimate.

Zacks Model Prediction

Our proven model shows that Chegg is likely to beat earnings because it has the right combination of two key ingredients.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is pegged at +3.85%. A positive Zacks ESP serves as a meaningful and leading indicator of a likely positive earnings surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Chegg has a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings estimates. Conversely, Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement.

The combination of Chegg’s Zacks Rank #3 and +3.85% ESP makes us reasonably confident about an earnings beat in the quarter to be reported.

Chegg, Inc. Price and EPS Surprise

Chegg, Inc. Price and EPS Surprise | Chegg, Inc. Quote


Other Stocks to Consider

Here are some other companies in the Internet-Software industry that can be considered as our model shows that they also have the right combination of elements to post an earnings beat this quarter.

HubSpot HUBS has an Earnings ESP of +1.32% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Benefitfocus BNFT has an Earnings ESP of +28.2% and a Zacks Rank #3.

Castlight Health CSLT has an Earnings ESP of +7.69% and a Zacks Rank #3.

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