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Memento Mori: Why the Chegg IPO is Not About Textbooks

On Wednesday, Chegg rang the bell and became a publicly traded company. For some Wall Street Trivia: it was the first tech IPO after last week’s much hyped Twitter offering.

Other than Twitter, which managed to grab the imagination of its investors, Chegg had a rather rough start but nevertheless went on to raise $187.5 million. Starting at $12.50 per share, the stock was down around 22% at the end of the trading day. At present, it is still in decline and now sits around $9.50.

The Issues

Some say the price was simply too high and that $9.50 is a price that better reflects the current performance of the company, similar to what we had seen when Facebook debuted last year.

Chegg is another tech company that went public without being profitable, even though its revenue grew about 27% year over year with quarterly revenues between $48 million to $68 million from March 2012 to June 2013. Yet Chegg posted a $50 million loss despite a 23% increase in sales for the first nine months of 2013, according toBloomberg West.

For now, Chegg is still a very seasonal business dependent on renting physical textbooks. About 80% of the revenue still comes from renting textbooks, which might seem a bit outdated with everyone talking about tablet deployments and digital textbooks. And here it gets interesting.

The Future is Services

According to Chegg’s SEC filing in 2010, only 0.2% of the revenue came from non-print products. One year later, in 2011, Chegg already had 6.8% of its revenue from non-print and in 2012, 13.2% of the revenue was generated from digital services.

To get a better idea why Dan Rosensweig is much more focused on services for students than skipping the print textbooks for digital textbooks, we can learn a lesson or two from Kno. Though heavily funded and with more than 225,000 digital textbooks in its library, the startup was sold for pennies on a dollar to Intel Education last week.

Memento Mori

Chegg seems to be very much aware that its core services—which got the company where it is today—won’t continue through this decade. Current partners might cut ties and go off on their own. It is aware of its own mortality, if you will. With the Internet and tablet devices, publishers themselves can now go directly for the students through digital products. There is no need for physical bookstores or other middlemen to distribute the textbooks. Also professors are now able to sell their own textbooks directly to students.

Apple and Inkling spotted that trend early enough and shaped their offerings to publishers towards a self served platform which they can use to create and distribute digital textbooks directly to their customers.

Profitability as a Choice

In the SEC filing, Chegg noted that it can’t assure investors that the company will be profitable any time soon. On Wednesday Dan Rosensweig, CEO of Chegg, explained on Bloomberg West that the company could be profitable right now. The issue remains that Chegg expanded into so many related categories with high potential that it needs to invest the money in future growth.

When being asked how much of the money is being earmarked for future acquisitions, Rosensweig answered, “We are armed to make smart decisions when they are available to us.”

When looking at opportunities the teams asks, “Can we grow into a whole new category like with Zinch, opening up the whole high school category? That’s become a business growing at 100% every year.”

Another example is CourseRank, which is currently used by over a million students to help them to get the required textbooks. This smart recommendation service enables Chegg to reduce marketing dollars which can then be invested elsewhere.

Investing in the Future

This IPO is not so much about the current business of renting physical textbooks but about the time after paper-based textbooks. Chegg apparently does not see a future with publishers or professors by their side, and they will probably choose more direct sales channels in order to balance out sinking margins.

Chegg sees itself much more as a service company, helping students to find the right college, get accepted, choose the right courses, and get valuable advice, which in the end could become a much more profitable business than today’s textbook rental service.

First published on edcetera – straight talk on edtech

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Kirsten Winkler is the founder and editor of EDUKWEST. She also writes about Social Media, Digital Society and Startups at