Chegg shares plunge while ChatGPT steals market share

ChatGPT is beginning to take market share from online learning platform Chegg (CHGG), Chegg executives endorsed it on an earnings call Monday night.

“In the first part of the year, we saw no significant impact from ChatGPT on our new account growth and were meeting expectations for new sign-ups,” Chegg CEO Dan Rosensweg said Monday. “However, since March we have seen a significant rise in student interest in ChatGPT. We now believe it has an impact on the growth rate of our new customers.”

Shares of Chegg sank on the news, down 45% on the open market on Tuesday.

The comment was part of Rosenweig’s prepared remarks. The topic became the focus of an earnings call that mentioned ChatGPT more than 20 times.

The chatbot launched by OpenAI on November 30 has been one of the many factors that have affected Chegg stock over the past few months. Chegg attempted reconciliation by joining forces with OpenAI to launch “CheggMate”, a chatbot built using OpenAI’s GPT-4 technology.

But the company hasn’t released a beta yet, and noted Monday that there won’t be a clear picture of how Cheggmate will perform until at least fall, if not 2024.

In the first quarter, Chegg reported revenue of $187.6 million, down 7% from a year ago. The company also saw year-over-year declines in subscription services earnings and earnings. Chegg expects all three of these categories to be down year-over-year in the second quarter as well.

The ChatGPT logo is seen in this illustration taken March 31, 2023. REUTERS/Dado Ruvic/Illustration

When asked on the earnings call if Chegg’s problems can be 100% blamed on ChatGPT or if something else is at play, Rosensweig indicated that the quarter was on track with the company’s goals through March.

“So the variable that changed was the launch of (GPT-4).”

The comment was part of Rosensweig’s prepared remarks. Although the topic wasn’t initially directed by Wall Street analysts, it became the focus of an earnings call that mentioned ChatGPT, another company’s proprietary product, more than 20 times.

“This is not something that fell from the sky,” Rosensweg said. “It’s just an acknowledgment that a technological shift has occurred. And we need to prepare for that and adjust our company and follow through aggressively and adjust our cost structure to do that.”

Several Wall Street analysts cut price targets for the stock in reaction to Chegg’s comment Monday.

Jefferies analyst Brent Thill has been bullish on the stock since 2019. But with what Thill described as “no growth and existential AI concerns,” he downgraded Chegg to Hold from Buy in a fresh note to clients Tuesday morning. It also cut its price target from $25 to $11, reversing a drop of nearly 40% from where Chegg shares closed before earnings.

Chegg’s management failed to articulate when the company’s AI strategy will be available to all customers and how the company plans to monetize that strategy in the long term, per Thill. So, without a strong second source of revenue, ChatGPT’s popularity among students could spread like wildfire on campus just as the Chegg product once did in popularity.

“We are concerned that CHGG’s core business is highly exposed to AI, raising concerns that CHGG’s core offering may become extinct as consumers try free AI tools,” Thill wrote.

Josh is Yahoo Finance Correspondent.

Click here for the latest stock market news and in-depth analysis, including the events that move stocks

Read the latest financial and business news from Yahoo Finance

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top