Schools and colleges have been forced to move their classes online as a rapid rise in COVID-19 cases has disrupted education across the globe. With the pandemic continuing to spread, many parents are still uncomfortable sending their children to educational institutions and prefer online studies.
Companies like Chegg, K-12, Bright Horizons, Arco Platform, Boxlight Corp., are benefiting from the growing demand for virtual learning. Using the TipRanks’ Stock Comparison tool, we will compare Chegg and K12 to see which stock offers a more compelling investment opportunity.
Direct-to-student learning platform Chegg has been a popular name in the online education field and provides study tools to school and college students. It primarily derives revenue from its Chegg Services business, which includes Chegg Study, Chegg Writing, Chegg Tutors, Chegg Math Solver, Thinkful, and Mathway. Its second segment called Required Materials earns income through rental and sale of print textbooks and eTextbooks.
Chegg’s educational resources have been in huge demand amid the pandemic and this reflected in its second-quarter results. The company’s second-quarter revenue surged 63% to $153 million as Chegg Services grew 57% Y/Y and accounted for 82% of the overall revenue. The company’s adjusted EPS jumped 40% to $0.35.
Subscribers for Chegg services surged 67% to 3.7 million in the second quarter. The June acquisition of Mathway expanded Chegg’s reach to more subscribers as the math problem-solving app has a presence in about 100 countries and its services are localized in 12 languages. Indeed, Chegg saw unprecedented demand in the second quarter- resulting in more subscribers in the quarter than in the entire 2018.
For capturing further demand, the company is investing in its international business, focusing on Chegg Study Pack, and also expanding the curriculum to add skills-based learning for in-demand jobs.
And Chegg is also implementing systems to address the problem of account sharing among students. Overall, Chegg’s 2020 revenue guidance reflects growth in the range of 47.2% to 49.6%.
On August 26, Piper Sandler analyst Arvind Ramnani initiated coverage of Chegg with a Buy rating and a price target of $90. The analyst believes that with education increasingly adopting online learning models, Chegg seems a primary beneficiary.
The analyst expects the pandemic to accelerate Chegg’s opportunity to further strengthen its brand, core offering and drive revenue growth and margins. (See CHGG stock analysis on TipRanks)
The Street’s Strong Buy consensus for Chegg is a result of 10 Buys, 2 Holds and no sell ratings. Chegg stock has surged a stellar 79% year-to-date and luckily for investors, the average analyst price target of $95.25 implies further upside potential of 40%.
K-12 provides online and blended education solutions, curriculum, and programs to students, and schools. In an update provided last month, the tech-enabled education company disclosed that its managed public school programs enrolled 170,000 students for the current school year as of Aug. 21, marking a 39% Y/Y rise compared to 122,300 enrollments in fiscal 2020 first quarter ended Sept. 20, 2019.
The benefit from COVID-19 led demand was not so apparent on K-12’s fiscal 2020 (ended June 30) revenue, as state laws and policies by authorizers and local school boards restricted schools to take new enrollment late in the school year just as the pandemic hit the US.
However, the company expects double-digit revenue and adjusted operating income in fiscal 2021 driven by higher enrollments as pandemic turns more schools online.
Meanwhile, K-12’s fiscal 2020 fourth-quarter revenue grew 4.9% Y/Y to $268.9 million and EPS increased 50% to $0.12. The company’s fiscal 2020 revenue grew 2.5% to $1.04 billion and excluding the Galvanize acquisition growth was 1.4%. K-12 acquired Galvanize, a provider of tech courses and boot camps having eight campuses in the US, in January. The company’s fourth-quarter EPS came in at $0.12, up from $0.08 in fiscal 2019’s fourth quarter. Excluding the impact of the Galvanize acquisition, EPS was $0.31.
Looking ahead, K-12 continues to invest in increased automation and process improvement as it is scaling its business and is also investing in growth areas like career readiness. It is hiring 1,300 additional teachers and education staff to address the growing demand for its programs.
On September 4, Sidoti analyst Gregory Pendy upgraded K12 to Buy from Hold but kept his price target unchanged at $45. The analyst believes that the pullback in K12 shares since the fiscal fourth-quarter results presents a buying opportunity.
In a research note to investors, Pendy stated that the K12’s core Managed Public-School business, which accounts for 90% of the overall revenue, is on pace for a record fall enrollment, providing “high revenue visibility” for fiscal 2021. (See LRN stock analysis on TipRanks)
The Street has a Strong Buy consensus for K12 based on the ratings of three analysts in the last 3 months. The stock has advanced by an impressive 68.4% and there is an upside potential of 31.27% according to the average analyst price target of $45.00.
Currently, analysts are bullish on both Chegg and K-12 given the huge addressable market for online education. However, whether these companies will continue to see strong momentum once the pandemic fades and educational institutions reopen is a matter of concern. If one is looking at upside potential over the next 12-months then Chegg stock looks more compelling than K-12 right now.
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment