Morgan Stanley Gives Chegg's Business Top Grades, But Not The Stock

Chegg Inc CHGG, a student-first connected learning platform, earns top grades for being well positioned to help students face ongoing challenges in their academic journey, according to Morgan Stanley. But that doesn't mean investors should be rushing to buy the stock.

The Analyst

Morgan Stanley's Brian Essex initiated coverage of Chegg's stock with an Equal-weight rating and $23 price target.

The Thesis

Chegg's transformation to become a fully digital platform should result in the company seeing ongoing acceleration in revenue growth, Essex said in a note. The company also faces a "meaningful opportunity" ahead after expanding to target the higher ed market as well as lower end middle school applications to increase its brand awareness.

Chegg could gain market share through efficient bundling, incentivized compliance as well as pricing power and many of these initiatives are in the early stages, according to Essex. The company holds a 3 percent market share within the 47 million population of the higher ed market in the U.S. alone. Outside of the U.S., the company has "barely scratched the surface" and the English speaking international market alone could add 5 million students.

Essex said the competitive environment remains fragmented as multiple vendors address portions of Chegg's Study, Writing and Tutorial solutions but lack any depth to offer a complete competitive solution.

Chegg's stock valuation is trading above the high margin Vertical Software group. The case for being aggressive on Chegg's stock could be made if the company shows signs of better revenue per subscriber, the analyst said.

Price Action

Shares of Chegg were trading lower Monday morning, but are up more than 140 percent over the past year.

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