Chegg, a ‘Netflix for textbooks,’ Is the Real Test of the IPO Market

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Mark Lennihan / AP

Pricey textbooks have become an unwelcome tradition at most colleges. Required texts can cost more than $250 new, and the rates are only going up. The cost of books leapt 82 percent between 2002 and 2012, almost as much as the 89 percent jump in tuition and fees, according to the U.S. Government Accountability Office. This strain on students’ wallets has presented opportunities for a new class of digital disruptors in the higher ed space. One of the most prominent, Chegg, is going public on Wall Street today.

Often billed as the “Netflix for textbooks,” Chegg’s primary business is renting and mailing millions of college textbooks to students around the country each semester at a fraction of a new book’s cost. The company is offering 15 million shares of common priced at $12.50, raising about $187.5 million for Chegg and making its initial market valuation almost $1.1 billion. Chegg will trade on the New York Stock Exchange under the ticker symbol CHGG.

The company is hoping to ride the wave of an extremely strong period for Internet stocks. Twitter’s successful IPO last week exceeded analyst expectations with a 73-percent first-day pop. Meanwhile companies like LinkedIn, Netflix and Facebook have seen their stock prices reach all-time highs in recent months.

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Like Twitter’s offering, Chegg’s IPO is depending heavily on the promise of future growth. The company, which sold and rented 5.5 million textbooks between October 2012 and September 2013, has posted mounting losses in the past several years, including a  $50 million loss in the first nine months of 2013. In its prospectus the company warns that it won’t be profitable in the near future. Revenue, though, is on the rise, growing 23 percent in the first three quarters of this year to $178 million. The company also had adjusted earnings before interest, tax, depreciation and amortization of $23 million for the first nine months of 2013.

Chegg began its life in 2001 as, a Craigslist-like online classifieds site for students at Iowa State University. It pivoted to the more lucrative textbook rental business in 2007. Now it is in the midst of another transformation as it tries to become an educational hub for students throughout high school and college. Chegg offers study guides to accompany more than 2,500 textbooks and has launched a college admissions portal to connect high schoolers with colleges they are considering attending (colleges pay Chegg a fee in order to contact students). The company also makes money through marketing deals with Millennial-focused brands like Red Bull, including their promotional items with the textbooks shipped to students. Between all its services, Chegg says it reaches 30 percent of college students and 40 percent of college-bound high school seniors in the U.S.

For now, though, print textbooks remain the company’s main revenue driver, generating 80 percent of total sales in 2013. Many other firms are vying for the attention of cash-strapped students, though. Amazon just launched a textbook rental program in 2012, and Barnes & Noble created one in 2010. Many campus bookstores also offer textbook rentals. Major book publishers like Pearson and McGraw-Hill have also partnered to launch CourseSmart, an online store that offers digital textbook rentals.

Other organizations are using different methods to lower student costs. At Rice University, a program to develop a series of free, open-source textbooks called OpenStax College has gained traction in the last year. Offering peer-reviewed texts for introductory courses in areas such as physics, biology and statistics, OpenStax books have so far been used by more than 50,000 students at about 350 schools, saving students $4.8 million from the sticker price of similar books from the big publishers. Eventually the non-profit organization wants to save 1.5 million students $150 million per year with a selection of 25 free textbooks for basic courses.

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“There are an increasing number of…entities that are really concerned about student access,” says Richard Baraniuk, the director of OpenStax. “If the momentum continues, I think you’re going to see a very different textbook world in the next five years.”

That could be good for Chegg, which is eager to shed its expensive print textbook business in favor of high-margin online education services. Education experts say the shift to cheaper digital offerings is inevitable, though no one is quite sure when it will happen.

“It just seems like Encyclopedia Britannica coming against competition from Wikipedia or print classifieds having to face competition from Craigslist,” says Mark Perry, a professor of finance and business economics at the University of Michigan-Flint. “The Internet is eventually going to have to disrupt this market.”