In our last article, we covered why most of Chegg's(CHGG) customer base may not be able to afford Chegg's services. There is more to that story though, as Chegg is also facing significant competition that likely would significantly reduce it's growth potential. At its current price, Chegg is trading as though its growth would last for many years, yet this isn't likely to happen especially considering there are many high quality lower priced services. We believe that as investors start realizing how much competition there is, Chegg will eventually re-rate to a lower multiple.
Textbook Solutions and Expert Q&A
Bartleby attracted over 50,000 subscribers during the spring rush period. However, BNED faces stiff competition from the likes of Chegg.
Textbook Sulutions and Expert Q&A is Chegg's largest segment. Chegg claims it has 25mil expert-answered Q&As and 5mil step-by-step textbook solutions set.
Chegg investor presentation
In the textbook solutions area, there are plenty of competitors. Slader.com allows users to search up textbook answers, is free and users can pay a small monthly sum to remove ads. According to similarweb, it has over 10mil views during the school term. Course Hero is also another potential competitor, which boasts over 25mil course specific study materials.
slader.com rankings
coursehero rankings
There are two main users of the expert Q&A platform - users who ask questions and users who read old answers.
For the users who ask questions, there seems to be a lot of much cheaper competition. Quora, Stackexchange, etc have a large number of experts answering questions on these sites, and they're free! The only problem we've noticed is the users aren't likely to directly give you the answer, as they're not monetarily incentivized.
For users who read old answers, if they're doing lower level problems, they likely can find the answer for free from Google. If they're doing higher level questions, the best way to get answers is likely through Chegg.
Admittedly the expert Q&A platform has an extremely strong network effect due to the sheer amount of users, which makes it one of the best ways to find the answer to a hard to solve problem. Unlike Chegg, very few other platform operators are willing to pay for content.
Until now. Introducing... Bartleby.com!
Bartleby is a platform created by Barnes and Noble Education(BNED) to compete with Chegg Learn.
bartleby.com
Bartleby is currently priced at $9.99 per month, much lower than Chegg's $15 per month, and users can get their first month for $4.99. Unlike Chegg, Bartleby allows users to ask up to 30 questions each month vs Chegg's 20 questions.
The reason why Bartleby hasn't overtaken Chegg yet is likely due to lower marketing and the fact that Bartleby is a fairly new product. However, that could change fairly quickly.
Bartleby has a major advantage over Chegg as BNED operates the campus bookstores for a large number of universities, so it is much easier for BNED to reach students than Chegg. Also, since word of mouth spreads quickly, we expect this to be a further driver of subscribers to BNED's service.
BNED has mentioned recently that Bartleby already has a strong slate of content and that the entire company is focused on this segment.
We introduced our DSS reporting segment just one year ago and by this upcoming fall rush, bartleby learn is expected to grow to offer nearly 2 million step-by-step homework solutions across approximately 1,200 titles.
Our physical footprint on campuses nationwide together with our deep knowledge of student course material consumption remains a significant competitive advantage allowing us to better inform and manage the cost of our bartleby content development.
Our entire company is focused on growing bartleby subscribers in recognition of the value we can deliver to both students and institutions and also the high margins this business will contribute to BNED as it scales.
-Q3 BNED earnings call
We believe Bartleby is a serious threat to Chegg's competitive advantage. Of course, it depends on how management executes, but there is a non-negligible chance that Bartleby could one day topple Chegg from it's throne.
Writing
Chegg investor presentation
Chegg Writing includes services for checking for plagiarism, citing sources, and checking grammar.
Regarding citing sources, all the front page results are from Chegg. That doesn't mean Chegg doesn't have competition, but rather that it has the best SEO.
Regarding the remaining services, Chegg faces plenty of competition from services like Grammarly, which utilizes a much more advanced tool to not only check for grammar but also improves other aspects like readability. It is a bit pricey, though.
grammarly website
There are also free alternatives, some of which can get higher rankings on google than Chegg.
google images
Overall, this segment isn't likely to be a major contributor to Chegg's revenues, considering it is mainly ad-supported. The ads are horrible, but we doubt users will be driven to sign up for the premium service, as downloading an adblocker is simple and free.
sample ads on bibme
Chegg Math
Chegg investor presentation
Chegg claims that a significant number of students are not prepared for college level math, and therefore Chegg Math could potentially get millions of subscribers from this pool of potential customers, right?
Probably not. The math solver space is the most crowded space Chegg has stepped into, with free solvers like Symbolab and paid math solvers(cheaper than Chegg) like Wolfram Alpha conquering the market.
Chegg Math not only has little brand awareness in this area, they are also priced much higher than competitors.
Symbolab pricing - Symbolab is free on PC
Wolfram Alpha pricing
Chegg Pricing
We don't expect Chegg Math to be able to garner a large amount of subscribers in this space anytime soon.
Chegg Tutors
Chegg Tutors is also operating in an extremely competitive segment of the market, with CourseHero, Wyzant, skooli, and many other companies offering similar services.
Source: Chegg
Honestly, this market is so competitive that we don't see why anybody would want to choose Chegg's offerings over other offerings. Quality of tutor is more likely to affect consumer choice than the company itself. We don't believe Chegg has a moat in this segment.
Bundling
One lever Chegg could pull to increase demand is bundling. However, we don't see how bundling could drive substantial growth over Chegg's existing offerings unless it was offered at a substantial discount. Students, after all, are price conscious, and are more likely to take the extra time to find the lowest price before signing on.
It also doesn't help that Chegg's traffic isn't too high, with 30-40mil students at it's peak. This means that Chegg doesn't have too much traffic to drive towards their promotions.
Source: similarweb
Valuation
The only Chegg offering that is superior to alternatives is the expert Q&A segment, where its original content far outnumbers competitors, and its citation offering, which has a marketing advantage.
However, with another massive company, BNED, stepping into the market and pricing its products 1/3 lower than Chegg's offering, we believe Chegg's competitive moat could be at stake.
As for the citation offering, we believe revenues are at stake as more PC users download adblock and remove Chegg's only source of revenue from this offering.
For the remaining segments, we believe Chegg will find it hard to grow in these markets considering it doesn't have a superior offering, is more expensive than the current offerings, and is less well known overall.
As such, we believe Chegg's double digit subscriber growth rates are likely to slow drastically in the medium term and we believe the company's SaaS multiple will return to earth as this happens. We have seen many other SaaS companies return to single digit P/S multiples as revenue growth slows, like EB, SVMK, etc, and we believe this outcome is likely for Chegg.
Conclusion
Overall, Chegg faces significant competitive headwinds in each of its segments, and this will likely dampen growth in the future. We believe Chegg Learn has been driving most of the growth in the past few years, but with more competitors coming into this space, we believe this growth will be short lived, and Chegg will re-rate to a lower multiple.
Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.