Yahoo Finance Lacklustre Performance Is Driving Chegg, Inc.'s (NYSE:CHGG) 42% Price Drop
Unfortunately for some shareholders, the Chegg, Inc. (NYSE:CHGG) share price has dived 42% in the last thirty days, prolonging recent pain. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 52% loss during that time.
Although its price has dipped substantially, Chegg's price-to-earnings (or "P/E") ratio of 4.3x might still make it look like a strong buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 15x and even P/E's above 29x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.
Recent times have been advantageous for Chegg as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
View our latest analysis for Chegg
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Chegg.
What Are Growth Metrics Telling Us About The Low P/E?
The only time you'd be truly comfortable seeing a P/E as depressed as Chegg's is when the company's growth is on track to lag the market decidedly.
Retrospectively, the last year delivered an exceptional 325% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.
Shifting to the future, estimates from the analysts covering the company suggest earnings growth is heading into negative territory, declining 108% over the next year. That's not great when the rest of the market is expected to grow by 5.0%.
In light of this, it's understandable that Chegg's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
What We Can Learn From Chegg's P/E?
Chegg's P/E looks about as weak as its stock price lately. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We've established that Chegg maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
It is also worth noting that we have found 4 warning signs for Chegg (2 are a bit concerning!) that you need to take into consideration.
If you're unsure about the strength of Chegg's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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