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Chegg is optimistic it can turn things around with its upcoming Cheggmate beta, an AI-focused student learning platform.
Chegg Inc (NYSE: CHGG) shares closed Wednesday trading at $10.17, up 12 percent from the day’s opening price. The student learning platform has significantly been negatively impacted by the rise of artificial intelligence including ChatGPT. Moreover, CHGG shares dropped more than 44 percent of its value after the company released its quarterly earnings results on Monday.
The hype surrounding ChatGPT and OpenAI has significantly reduced Chegg’s traffic considerably. Nevertheless, Chegg is optimistic it can turn things around with its upcoming Cheggmate beta, an AI-focused platform. Notably, Chegg CEO Dan Rosensweig stated that Cheggmate is slated to be unveiled this month in order to negate the effects of GPT-4.
“In the first part of the year, we saw no noticeable impact from ChatGPT on our new account growth and we were meeting expectations on new sign-ups,” Rosensweig said during the earnings call Monday evening. “However, since March we saw a significant spike in student interest in ChatGPT. We now believe it’s having an impact on our new customer growth rate.”
Chegg, Its Shares and the Market Outlook
Chegg declined to issue a market outlook for the remaining part of the year due to the uncertainties caused by the rise of AI platforms like ChatGPT. Nevertheless, the company noted that it anticipates revenues for this quarter to come in between $175 million and $178 million, which is far below analysts’ expectations of $193.6 million according to a report by FactSet.
As expected, there has been a significant influx in the use of ChatGPT and its products by learning students in the past few months. Nevertheless, Chegg officials say their sign-ups will continue to rise after most of the students realize that GPT-4 is not as accurate as purported.
Additionally, the company’s Cheggmate is slated to have more informative and well-organized data collected from years of Chegg history. As a result, the company is positive there will be more profitable quarters ahead.
Currently, the company is valued at approximately $1.09 billion, with approximately 119.72 million shares outstanding. Having declined approximately 59 percent YTD, most of the analysts have issued a hold rating on CHGG shares and an average price target of about $14.
For instance, analysts at Piper Sandler said in a report that there are significant questions surrounding the pricing model, AI-related expenses, and whether advancements in AI “democratize their core offering to the extent that their competitive barriers are lowered”. The firm, which has an equivalent of a hold rating on the Chegg shares, cut its price target on CHGG to $11 from $17.
Nonetheless, the company has been generating free cash flow and has enough cash to pay off its debts.
Chegg is facing massive disruptions in its education business amid the rapid growth of AI platforms. To contain this, Chegg is building its own AI platform CheggMate in collaboration with OpenAI.
The introduction of ChatGPT by OpenAI has certainly created a massive disruption in the tech world while giving other tech giants like Alphabet (NASDAQ: GOOGL) a run for their money. Now, AI chatbot ChatGPt is causing a major disruption in the education industry as well, and online education firm Chegg is among the major ones to feel the heat.
On Tuesday, May 2, Chegg’s stock (NYSE: CHGG) price tanked by a massive 48% in a single day ending the trading session at $9.08. During the earnings call on Monday, May 2, Chegg CEO Dan Rosensweig said:
“In the first part of the year, we saw no noticeable impact from ChatGPT on our new account growth and we were meeting expectations on new sign-ups. However, since March we saw a significant spike in student interest in ChatGPT. We now believe it’s having an impact on our new customer growth rate.”
Over the years, Chegg has specialized in providing online tutoring and homework assistance. During the earnings call, the company cut down its revenue earnings to between $175 million and $178 million this quarter. This was far below the market estimate of $193.6 million.
Despite this, Chegg managed to beat first-quarter expectations on the top and the bottom line with earnings per share of 27 cents above the analysts’ expectations of 26 cents.
Analysts Downgrade Chegg Stock amid AI Disruption
Amid the AI disruption caused by ChatGPT, several market analysts have started downgrading the Chegg stock. Morgan Stanley analysts Josh Bear slashed the CHGG price target to $12 from the previous $18. The analyst also noted that AI has “completely overshadowed” the results for the company.
On the other hand, Jefferies has also downgraded the CHGG stock to hold from buy, citing the threat of artificial intelligence that the company is facing. As a result, Jefferies has also slashed the price target for CHGG stock to $11 from $25 earlier.
In order to be better placed in such disrupting times, Chegg is developing its own AI product, CheggMate. The goal of this product will be to help students with their homework. Interestingly, Chegg is building this product in collaboration with OpenAI, the same company that built ChatGPT. But Jefferies analyst Brent Thill believes that the impact of this product will be uncertain. He added:
“While CHGG plans to launch the CheggMate beta this month to a select few, the timing of a full launch is unclear. We don’t expect there to be any meaningful impact from CheggMate in FY23, believing any potential impact won’t show up until FY24 at the earliest.”
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Bhushan is a FinTech enthusiast and holds a good flair in understanding financial markets. His interest in economics and finance draw his attention towards the new emerging Blockchain Technology and Cryptocurrency markets. He is continuously in a learning process and keeps himself motivated by sharing his acquired knowledge. In free time he reads thriller fictions novels and sometimes explore his culinary skills.