Chegg wants to end the textbook ripoff game for students, and its stock is soaring

Online student tutoring and textbooks company Chegg Inc (Chegg Stock Quote, Chart NYSE:CHGG) saw its share price jump on Tuesday as investors responded to the company’s quarterly earnings that beat consensus estimates. CEO Dan Rosensweig says industry trends point in Chegg’s favour, as today’s college and university students are no longer content with being ripped off by textbook prices and are happier renting them instead.

Shares of Chegg shot up over seven per cent in trading on Tuesday as the company reported fourth quarter revenue of $95.7 million, a 30.2 per cent increase year-over-year, and net income of $5.35 million, a 46.2 per cent increase year-over-year. Management upped its guidance for earnings in 2019, putting its Adjusted EBITDA between $115 million and $118 million. (All figures in US dollars unless otherwise noted.)

Rosensweig says the company’s 37 per cent year-over-year growth in its Chegg Services division (which includes tutoring and study aids) is a big takeaway from the quarter.

“2018 was a fantastic year for Chegg. Chegg Services revenue grew 37 per cent year over year and we exceeded our profitability expectations, driven by the leverage from our subscription services,” said Rosensweig, in a press release on Monday. “We enter the year with strong momentum, giving us the confidence to raise 2019 guidance as we focus on our mission of helping students improve their outcomes.”

Rosensweig spoke to CNBC on Chegg’s progress, saying that his company is tapping into a trillion-dollar market with 20 million students in the US alone.

“40 per cent of [college students] work 30 hours per week or more, 25 per cent of college kids actually have kids —we have a different set of kids than people imagine are in college,” Rosensweig says to CNBC on Tuesday.

“Textbooks aren’t dead. Textbooks at the bookstore are dead. When we invented the rental model, we changed the whole dynamic of the publishing industry and the pricing industry. Textbooks have always been a ripoff, so being able to rent them at $30 or $32 each there’s no reason for the bookstore to sell them anymore and they’ve adjusted their business model to selling tchotchkes and sweatshirts and food and other things,” he says.

Textbooks are a major expense for university and college students. In Canada, a year’s supply can run into the C$900 range, according to a 2017 survey by Macleans. Canada does have textbook rental services (bookmob.ca, for one), while Chegg currently is operating textbook rental only in the United States.

Rosensweig says that while other options are out there, Chegg’s student services are what set it apart.

“Amazon does textbook rental but it’s such a small part of their business and they don’t offer anything else so if we can meet them on price — which we do — and we can meet them on service and convenience,” he says. “We ship over six million textbooks a year now but the real business is all digital, it’s homework help, it’s tutoring, it’s math — the more that we can offer students, the more content and capabilities, the bigger the market opportunity gets for us and you’re beginning to see it in our results.”