Chegg, Inc. (CHGG) vs. Paychex, Inc. (PAYX): Comparing the Education & Training Services Industry’s Most Active Stocks

Chegg, Inc. (NYSE:CHGG) shares are up more than 19.60% this year and recently increased 0.95% or $0.32 to settle at $33.99. Paychex, Inc. (NASDAQ:PAYX), on the other hand, is up 25.39% year to date as of 09/12/2019. It currently trades at $81.69 and has returned -2.52% during the past week.

Chegg, Inc. (NYSE:CHGG) and Paychex, Inc. (NASDAQ:PAYX) are the two most active stocks in the Education & Training Services industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

Growth

One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect CHGG to grow earnings at a 25.00% annual rate over the next 5 years. Comparatively, PAYX is expected to grow at a 9.10% annual rate. All else equal, CHGG’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 41.42% for Paychex, Inc. (PAYX). CHGG’s ROI is -1.10% while PAYX has a ROI of 30.40%. The interpretation is that PAYX’s business generates a higher return on investment than CHGG’s.

Cash Flow

Earnings don’t always accurately reflect the amount of cash that a company brings in. CHGG’s free cash flow (“FCF”) per share for the trailing twelve months was +0.17. Comparatively, PAYX’s free cash flow per share was -0.03. On a percent-of-sales basis, CHGG’s free cash flow was 0.01% while PAYX converted -0.29% of its revenues into cash flow. This means that, for a given level of sales, CHGG is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. CHGG has a current ratio of 13.20 compared to 1.20 for PAYX. This means that CHGG can more easily cover its most immediate liabilities over the next twelve months. CHGG’s debt-to-equity ratio is 1.90 versus a D/E of 0.00 for PAYX. CHGG is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

CHGG trades at a forward P/E of 37.98, a P/B of 8.78, and a P/S of 11.58, compared to a forward P/E of 24.47, a P/B of 11.21, and a P/S of 7.76 for PAYX. CHGG is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. CHGG is currently priced at a -29.71% to its one-year price target of 48.36. Comparatively, PAYX is -0.23% relative to its price target of 81.88. This suggests that CHGG is the better investment over the next year.

Risk and Volatility

To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. CHGG has a beta of 0.96 and PAYX’s beta is 0.88. PAYX’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. CHGG has a short ratio of 11.81 compared to a short interest of 5.98 for PAYX. This implies that the market is currently less bearish on the outlook for PAYX.

Summary

Paychex, Inc. (NASDAQ:PAYX) beats Chegg, Inc. (NYSE:CHGG) on a total of 7 of the 14 factors compared between the two stocks. PAYX is growing fastly, generates a higher return on investment and has lower financial risk. In terms of valuation, PAYX is the cheaper of the two stocks on an earnings and sales basis, Finally, PAYX has better sentiment signals based on short interest.