Chegg's Strategic Pivot: Can Cost Cuts and AI Diversification Turn the Tide?

Nathaniel StoneWednesday, Jun 4, 2025 10:29 am ET
58min read

Chegg (NYSE: CHGG), once a darling of the edtech sector, has faced a brutal reckoning in 2025. Its core subscription business—the lifeblood of its revenue—is in free fall, with subscriber counts plummeting 31% year-over-year and revenues down 30%. Yet, amid the turmoil, the company is executing a high-stakes pivot: slashing costs, diversifying into institutional partnerships, and leveraging its AI capabilities to carve out new revenue streams. The question is whether this pivot can transform

from a fading star into a resilient player in the $8.5 trillion global education market. With its stock trading at just $1.21—a 97.9% decline from its 2021 peak—the stakes for investors couldn't be higher. Here's why the risk-reward calculus is now tilted in favor of the bulls.

The Core Collapse and the AI Threat
Chegg's struggles stem from its reliance on direct-to-student subscriptions, which now face existential threats from free AI tools like ChatGPT and Google's Gemini. These platforms are eroding demand for paid study aids, with Chegg's traffic down sharply as students turn to AI for instant answers. The numbers are stark: Q1 2025 Subscription Services revenue fell to $107.6M, while subscribers dropped to 3.2 million—levels not seen since 2015.

But Chegg isn't just shrinking; it's fighting back. Its strategy hinges on three pillars: cost discipline, institutional partnerships, and AI-driven diversification. Let's dissect each.

1. Cost Cutting: A Necessary Reset

Chegg's restructuring plan is aggressive. By slashing 248 employees (22% of its workforce) and closing offices, it aims to save $45–$55M in 2025 and $100–$110M by 2026. These cuts—though painful—are critical to realigning costs with its shrinking revenue base. Non-GAAP EBITDA hit $19.3M in Q1, a 16% margin, signaling progress toward profitability.

The move also frees capital to invest in higher-margin initiatives. For example, its AI-powered “Solution Scout” and “Create” tools—designed to compete with ChatGPT—require minimal incremental costs once built, offering a path to scale efficiently.

2. Diversification: Licensing Gold and Institutional Deals

Chegg's crown jewel isn't its subscription service—it's its proprietary database of 400 million question-answer pairs. This asset is now being monetized through licensing deals with tech giants. Two agreements in Q1 generated $4M, with $7M expected in Q2. At scale, this could become a $100M+ annual revenue stream, akin to Microsoft's licensing of its AI models.

Meanwhile, institutional partnerships are expanding rapidly. Chegg has grown its pilot programs from 5 to 15 colleges/universities, targeting 40 by year-end. These deals—selling access to its AI tools and content to schools—offer predictable B2B revenue. Busuu, its language-learning arm, is another bright spot, with 7% revenue growth and B2B sales surging 29%.

3. The Valuation Case: A Bargain at 2.1x EV/EBITDA

Chegg's stock is a textbook value play. With a market cap of $128M and enterprise value of $147M, it trades at just 2.1x EV/EBITDA—far below peers like Coursera (10x) or Pluralsight (15x). GuruFocus estimates a fair value of $5.98 per share, implying a 394% upside from current levels.

CHGG Closing Price

The disconnect between valuation and potential is stark. Even a modest recovery to $3.00—a fraction of its $5.98 target—would double investor returns. Meanwhile, its $126M cash balance and net cash position of $64M provide a safety net for execution missteps.

The Risks: AI's Double-Edged Sword

Chegg isn't out of the woods yet. Google's AI Overviews and OpenAI's ChatGPT remain existential threats, siphoning traffic and subscribers. Competitors like Quizlet and Khan Academy are also nibbling at its market share.

Execution is another hurdle. Scaling institutional partnerships and content licensing requires sales expertise Chegg has historically lacked. If these initiatives underdeliver, the company could face further margin pressure.

Conclusion: A High-Reward, High-Risk Gamble

Chegg is a classic “value trap” with a twist: its valuation is so compressed that even partial success in its pivot could unlock massive returns. The stock's $1.21 price is a cry for help, pricing in nearly all possible bad outcomes. For investors with a 3–5 year horizon, this is a compelling opportunity to buy a $500M+ business (by fair value) at $128M—a discount of 75%.

The catalysts are clear:
- A positive update on institutional partnerships and licensing deals.
- Proof that Busuu and Chegg Skills can scale profitably.
- A strategic buyer emerging from its “go-private” process, which has already drawn “dozens of interested parties.”

While risks abound, the asymmetry here is undeniable. At current levels, Chegg offers one of the highest risk-reward ratios in the edtech sector. The question isn't whether it can survive—it's whether investors dare to bet on its rebirth. For those who do, the upside is stratospheric.

Action to Take: Consider a small position in CHGG with a tight stop-loss, targeting $3.00–$5.00 over the next 12–18 months. Monitor Q2 results and strategic updates closely—this is a stock that could make or break your portfolio.