What Happened?

Shares of online study and academic help platform Chegg (NYSE:CHGG) fell 32.1% in the morning session after the company reported weak fourth-quarter 2024 results, as both its number of users and services subscribers fell short of Wall Street's estimates, which is never a good look. Revenue plunged 24%, with subscription sales down 23%, highlighting the struggle to keep and attract customers. 

Despite aggressive cost-cutting, adjusted EBITDA dropped 45% year-on-year. The swing from a profit last year to a $6.1 million net loss this quarter adds to the concerns. Management pointed to Google's AI Overviews feature as a major issue, saying it's pulling traffic away from Chegg and hurting sales. The company now plans to take legal action. 

And the outlook for Q1 2025? Not great, as lower-than-expected sales and EBITDA guidance suggest the pain isn't over yet. 

Overall, this quarter was mediocre, and with the market fearing that this company is toast due to AI, a big move makes sense.

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What The Market Is Telling Us

Chegg’s shares are extremely volatile and have had 73 moves greater than 5% over the last year. But moves this big are rare even for Chegg and indicate this news significantly impacted the market’s perception of the business. 

The biggest move we wrote about over the last year was 8 months ago when the stock gained 28.8% on the news that the company announced a new restructuring plan, which also involves refocusing on its core audience (mostly Students) in a Shareholder Letter shared with the public. This effort will involve the provision of more individualized support to learners via a single platform enabled with AI (artificial intelligence) capabilities. The restructuring effort includes the layoff of 441 employees, which represents 23% of the company's global workforce. 

David Longo, Chegg's Chief Financial Officer, added, "We expect the restructuring will result in non-GAAP expense savings for 2025 of $40 million - $50 million. For 2025, we remain committed to our goal of 30%+ Adjusted EBITDA margin, and we believe we can deliver at least $100 million in Free Cash Flow. We are also reiterating our previous second-quarter guidance that we provided on April 29, 2024." 

Overall, the update highlights the company's focus on improving growth and profitability, with some of the cost reduction efforts highlighted likely to positively impact the bottom line in the near term.

Chegg is down 33.3% since the beginning of the year, and at $1.12 per share, it is trading 87.6% below its 52-week high of $9.04 from February 2024. Investors who bought $1,000 worth of Chegg’s shares 5 years ago would now be looking at an investment worth $29.83.

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