Chegg (NYSE:CHGG) inventory rallied 16% after the net schooling firm posted its fourth-quarter earnings report.

Income rose 1% yr over yr to $207.5 million, which beat analysts’ expectations for $192.5 million and administration’s steerage for a 5% to six% decline. Its adjusted internet revenue declined 18% to $63.5 million, or $0.38 per share, which additionally beat expectations by $0.07.

The market’s response to Chegg’s fourth-quarter earnings was a lot hotter than its response to the prior report in November when the inventory misplaced practically half its worth in a single day. Nevertheless, Chegg inventory stays practically 75% beneath its all-time excessive from final February.

Picture supply: Getty Photos.

Ought to traders take into account choosing up shares of Chegg after its post-earnings bounce? Let’s discover out.

Chegg’s post-lockdown slowdown

Chegg Companies, which hosts the corporate’s subscription-based on-line schooling and tutoring providers, accounted for 86% of whole income in 2021. The remaining got here from its Required Supplies division, which handles textbook leases.

The pandemic generated tailwinds for each segments in 2020 as extra college students stayed at house and attended on-line lessons.

Knowledge supply: Chegg 10-Ok filings. YOY = year-over-year.

However these tailwinds weakened all through 2021 as extra colleges reopened. Decrease faculty enrollment charges and labor shortages exacerbated that slowdown at its Required Supplies division.

Nonetheless, Chegg nonetheless ended the yr with 7.8 million Chegg Companies subscribers, which represented an 18% soar from 2020. Its gross margin fell one proportion level to 67% in 2021, however its adjusted earnings earlier than curiosity, taxes, depreciation, and amortization (EBITDA) margin nonetheless expanded from 32% to 34% as the corporate reined in working bills.

The slowdown will proceed in 2022

Chegg expects income to rise 1% to three% yr over yr within the first quarter of 2022, and seven% to 9% for the complete yr.

Administration can be guiding for gross margin to land between 70% and 72% this yr. It attributes that enlargement to the next mixture of income from Chegg Companies, which can scale back the corporate’s general dependence on the lower-margin Required Supplies section.

Nevertheless, adjusted EBITDA margin might dip to twenty-eight% within the first quarter and 32% for the yr as Chegg ramps up its investments in Busuu, the language studying platform it acquired final month.

Primarily based on that outlook, Chegg believes its adjusted EBITDA will likely be roughly flat yr over yr within the first quarter and 2022 general.

An unappealing valuation and long-term challenges

Chegg inventory trades at 28 instances ahead earnings estimates and over 5 instances income. These valuations can be cheap for a rising firm, however they don’t seem to be supported by Chegg’s steerage for single-digit top-line progress and flat earnings.

Traders can simply discover faster-growing shares with comparable valuations on this market. Alphabet trades at 24 instances ahead earnings, however analysts anticipate it to generate stronger income and earnings progress than Chegg this yr. On-line-education firm Coursera is not worthwhile, but it surely generates superior gross sales progress. Its inventory trades at six instances gross sales.

In the meantime, Chegg’s critics proceed to claim that Chegg Research, the “homework assist” division of its Chegg Companies platform, helps college students cheat by outsourcing their homework issues to on-line tutors. These criticisms could power Chegg to implement tighter academic-honesty controls throughout its platform, doubtlessly decreasing its general reputation.

There are no compelling causes to purchase Chegg now

Chegg inventory obtained overheated in the course of the rally in progress shares in early 2021. At its all-time excessive, shares raded at over 90 instances earnings, which was clearly an unsustainable valuation for the corporate because it moved past pandemic lockdowns.

Due to this fact, Chegg’s subsequent decline merely reset its valuation, and its sluggish progress expectations for 2022 point out it might have much more draw back. Traders ought to keep away from Chegg and give attention to stronger tech corporations as a substitute.