Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Chegg Inc (CHGG, Financial). The stock, which is currently priced at $10.49, recorded a gain of 18% in a day and a 3-month increase of 6.94%. The stock's fair valuation is $28.69, as indicated by its GF Value.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page provides an overview of the fair value that the stock should be traded at. It is calculated based on historical trading multiples such as PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow, adjusted for the company's past performance and growth, along with future business performance estimates.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
However, investors need to consider a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with Chegg should not be ignored. These risks are primarily reflected through its low Altman Z-score of 1.36. These indicators suggest that Chegg, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Deciphering the Altman Z-Score
Before delving into the details, let's understand what the Altman Z-score entails. Invented by New York University Professor Edward I. Altman in 1968, the Z-Score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
Snapshot of Chegg's Business Operations
Chegg Inc is an American educational services company that supports learners with academic course materials, career, and personal skills development. The company's offerings include Subscription Services like Chegg Study Pack and Busuu, accessible internationally, and Skills and Other services such as advertising and textbook offerings. With a market capitalization of $1.20 billion and sales of $733.50 million, Chegg's financial health is crucial for investors considering its stock.
Chegg's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of Chegg's Altman Z-score reveals that Chegg's financial health may be weak, suggesting possible financial distress. This is a significant red flag for investors as it indicates that Chegg could face serious financial challenges in the near future, potentially impacting its stock's performance negatively.
Conclusion: Assessing the Value Trap Potential
Despite the allure of a seemingly undervalued stock price, Chegg's financial indicators, such as the low Altman Z-score, point towards the possibility of it being a value trap. Investors must exercise caution and conduct rigorous analysis beyond surface-level metrics. GuruFocus Premium members looking for financially sound investments can find stocks with high Altman Z-Scores using the Walter Schloss Screen. In the case of Chegg, the question remains: is the current stock price a bargain, or is it a siren's call luring investors into troubled waters?
This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
