5 Small-Cap Growth Stocks Hedge Funds Love

4. Chegg, Inc. (NYSE:CHGG)

Number of Hedge Fund Shareholders: 40

Chegg, Inc. (NYSE:CHGG) ranks fourth on the list of small-cap growth stocks hedge funds like, though that could change once the Q2 data is available, as the only two funds that have filed on CHGG so far both sold out of their positions. Nonetheless, Chegg has the support of several major hedge funds, including Fir Tree, founded by Jeffrey Tannenbaum, and John Overdeck and David Siegel’s Two Sigma Advisors.

It was reported in May that Byju’s was considering the acquisition of either Chegg, Inc. (NYSE:CHGG) or 2U, Inc. (NASDAQ:TWOU), with the company reportedly in talks to buy the former. The market wasn’t overly enthused about the prospect, perhaps given that Byju’s had secured just $2.4 billion in financing for a deal, while CHGG was already valued at $2.2 billion. It now appears that Byju’s has pivoted to 2U, which makes more sense given that company’s smaller size.

The Artisan Mid Cap Fund believes Chegg, Inc. (NYSE:CHGG)’s U.S penetration has become relatively mature, which bolsters the need for strong international expansion for the stock to do well going forward. It had this to say about CHGG in its Q4 2021 investor letter:

“Short-term market dynamics aside, we did experience several disappointing profit cycle developments during the quarter, Chegg and Roku in particular. Chegg is a digital education platform. A pattern of steady long-term growth in US subscribers surprisingly came to an end when it reported Q3 results. This precipitated a sharp decline in the company’s valuation and our estimate of its private market value (PMV). Management cited factors such as fewer enrollees in 2-year colleges (lured into the workforce by higher wages) and less need for study aides as COVID-related pressures have resulted in students taking less-challenging courses and professors assigning lighter workloads. We view these explanations as mostly logical, but we also believe US penetration of the company’s services has become relatively mature. These headwinds could persist for at least the next few quarters, and we are currently evaluating whether other long-term growth drivers—international subscriber growth, new services—remain intact. Meanwhile, it represents a very small GardenSM position in our portfolio.”