SANTA CLARA -- Twitter's eye-popping IPO last week led many pundits to predict a new wave of optimism for consumer Internet startups -- if not an outright stock bubble.
But the first initial public offering by a Silicon Valley company in Twitter's wake seemed to lay such fears to rest Wednesday. Shares of Santa Clara-based Chegg, an online textbook rental clearinghouse, landed with a thud.
Its 22.6 percent loss was the worst first-day stock performance of 2013, according to IPO advisory firm Renaissance Capital.
Demand for Chegg seemed solid Tuesday night, when the 8-year-old company sold 15 million shares to institutional investors at $12.50 apiece. That was $1 higher than the expected price range, netting the company $187.5 million and valuing it at more than $1.1 billion.
But Wall Street didn't share that enthusiasm. Trading under the symbol CHGG on the New York Stock Exchange, the stock opened Wednesday at $11, then kept falling. Shares finished trading at $9.68.
Still, Santa Clara University professor Steve Diamond said the flop isn't a reflection on the length of Twitter's coattails.
Diamond, who teaches business law and also advises startups, argued that Twitter's 73 percent first-day "pop" was a sign that the microblogging stock was underpriced, not proof of runaway investor optimism.
"I don't read the Chegg result as indicating the bubble was there and now it's gone," he said. "The Twitter IPO does show there's an appetite out there. There's going to be hits, and they're going to be misses."
Chegg CEO Dan Rosensweig, asked whether he was surprised by the market's tepid reaction, said he was thinking long-term.
"Our mission is to put students first," he said via email. "Today we raised the capital that allows us to further invest in our vision. ... The market will do its job and we will do ours by staying focused and delivering long-term value."
Founded in 2005 by a group of Iowa State students and alumni, Chegg's name refers to the chicken-and-egg dilemma of students who need jobs to pay for college but have difficulty getting good jobs without an education. The company's co-founders hoped to help users get around that problem by cutting college costs; textbooks and supplies cost students roughly $1,200 a year, Chegg stated in its IPO filing.
Revenues and net losses have grown over the past three years. In 2012, Chegg lost $49 million on revenues of $213.3 million; over the first nine months of this year, the company lost $50.4 million while generating revenues of $178.5 million. In addition, deep-pocketed competitors like Google (GOOG) and Amazon have entered the textbook rental business.
Chegg has branched into other services in recent years, including study guides and online help with tough subjects. The company claimed in its prospectus that it reaches 30 percent of all college students and 40 percent of college-bound high school seniors.
"The additional element with Chegg is the broader set of offerings, the fact that we can be involved in many different aspects of a student's life," said Paul Holland, a general partner at venture firm Foundation Capital and a Chegg board observer.
"The physical textbook market was a great opening for that," Holland added in a Wednesday phone interview, "and then over time we'll be in a lot of different areas."
Chegg has landed almost $200 million from Foundation and other venture capital firms such as Floodgate and Kleiner Perkins Caufield & Byers. Its board includes Shutterfly Chief Executive Jeff Housenbold and San Francisco 49ers CEO Jed York.
The only insider selling any stock in the IPO, however, was co-founder Aayush Phumbhra. He unloaded 600,000 shares, retaining nearly 2 million after the offering.
Contact Jeremy C. Owens at 408-920-5876; follow him at Twitter.com/jowens510. Contact Peter Delevett at 408-271-3638; follow him at Twitter.com/mercwiretap.
Source: Staff research