Chegg's Free Cash Flow Turns Negative - Just a Temporary Setback?

Chegg, Inc. CHGG reported negative free cash flow in the third quarter of 2025, which raised concerns about its financial trajectory. However, a closer look suggests the shortfall may be more transitional than structural as Chegg aggressively reshapes its business model. Free cash flow during the quarter ended Sept. 30, 2025, was negative $900 million, mainly impacted by a one-time $7.5 million settlement payment to the FTC and $5.5 million in severance payments related to its restructurings. Year over year, free cash flow declined 93.7% in the third quarter of 2025 to $2.8 million.

Chegg is under pressure in its business operations, with revenues falling 35.8% year over year in the first nine months of 2025. This downturn was due to reduced contributions from its Subscription Services and Skills and Other segments, whose net revenues declined year over year by 37% and 29%, respectively. AI-driven alternatives and reduced Google search traffic are weighing heavily on subscriber growth and engagement for Chegg.

Notably, the strategic pivot toward Chegg Skilling is central to this edtech company’s turnaround narrative. This unit, which includes Busuu and Chegg Skills, is expected to post 14% year-over-year growth in the fourth quarter of 2025, supported by rising demand for AI, language and workforce reskilling programs. Management believes this B2B-focused segment can deliver sustained double-digit growth while the legacy business continues to fund the transition.

While negative free cash flow is never ideal, Chegg’s third-quarter dip appears tied to restructuring costs rather than deteriorating fundamentals. Execution on skilling growth will be the key determinant of whether this setback truly proves temporary.

Chegg’s Cash Crunch vs. Cash-Rich EdTech Peers

Chegg has struggled recently to maintain positive free cash flow as its legacy textbook, homework help and tutoring services face intense competition from AI-generated solutions and changing search behavior. Notable competitors include Udemy, Inc. UDMY and Duolingo, Inc. DUOL.

Comparatively, Udemy, which operates a marketplace for online courses created by independent instructors, has delivered positive operating cash flow and free cash flow more consistently in 2025. It was supported by strong uptake in its subscription plans and enterprise B2B relationships. Udemy’s balance sheet shows healthy cash and equivalents, giving it runway to invest in content expansion and AI-enabled offerings without burning through reserves.

Duolingo, while not a pure online academic competitor to Chegg, stands out with robust subscription revenues, high engagement and strong cash generation. This is attributable to Duolingo’s gamified language platform, which has maintained positive operating cash flow amid rapid growth.

Chegg Stock’s Price Performance & Valuation Trend

Shares of this California-based education technology company have tumbled 21.7% in the past three months, underperforming the Zacks Internet - Software industry, the Zacks Computer and Technology sector and the S&P 500 Index.

CHGG stock is currently trading at a discount compared with the industry peers, with a forward 12-month price-to-earnings (P/E) ratio of 7.25, as evidenced by the chart below.

Earnings Estimate Trend of CHGG

The Zacks Consensus Estimate for 2026 earnings has remained stable at nine cents per share over the past 60 days. However, the estimated figure for 2026 indicates a whopping 221.4% year-over-year growth.

Chegg stock currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research