Chegg Shares Crash As CEO Admits Threat From OpenAI’s ChatGPT

Chegg shares crashed in premarket trading on Tuesday as executives acknowledged that OpenAI’s ChatGPT was threatening the growth of its homework-help services. This marks one of the first notable market reactions to AI chatbots upending an industry.

On Monday, California-based Chegg reported a 7% year-over-year decline to $187.6 million in the first quarter. It saw a 5% drop in the number of subscribers to 5.1 million. Most of its revenue streams come from homework-help subscriptions, which start at $15.95 per month. 

“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,” Chief Executive Officer Dan Rosensweig said in prepared remarks during the company’s first-quarter earnings Monday. 

“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,” Rosensweig said. 

Chegg withdrew its full-year guidance because of the surge in the popularity of ChatGPT. Shares tumbled as much as 43% in premarket trading. If premarket losses hold, this will be the most significant decline since Nov. 2, 2021. 

Wall Street analysts currently have three buys, 12 holds, and one sell. Bloomberg data shows the average price target is around $17.82. 

Here’s what analysts are saying about ChatGPT threatening Chegg’s business model (list courtesy of Bloomberg):

Jefferies (cut to hold from buy, PT to $11 from $25) 

• AI headwinds are starting to impact Chegg’s “fundamental story”

• “While retention rates of CHGG’s existing customers remain strong now, we fear that student usage of AI tools like ChatGPT could cause a viral sensation around campus, which could increase churn in the coming quarters”

• PT set to $11, implies a 38% decrease from last price 

Morgan Stanley (equal-weight, PT cut to $12 from $18) 

• Chegg’s solid 1Q results “completely overshadowed by threat and impacts from generative AI”

• “Expect substitute AI tools to capture ~20% of Chegg’s subscriber base” 

KeyBanc (sector weight)

• Chegg admitted to seeing incremental headwinds from ChatGPT, the warning offset the company’s “alright 1Q results”

• These new headwinds led Chegg to lower 2Q guidance 

Piper Sandler (Neutral, PT cut to $11 from $17)

• The company needs to “make significant changes in a rapidly changing environment”

• “Commend management for recognizing the tectonic shift and their desire to make changes across their business model and operations”

This news had a ripple effect on education stocks, with London-based Pearson experiencing a decline of over 8%.

The challenge posed by AI chatbots extends beyond Chegg and other educational companies, affecting industries across the entire economy. To remain competitive, companies must embrace AI integration, which will lead to substantial job loss due to the automation of various tasks. Recall what IBM said yesterday…