What happened

The share price of learning platform Chegg (CHGG 1.88%) cratered on Tuesday after the company reported solid first-quarter financial results, but warned that its business model is being disrupted by recently debuted artificial intelligence (AI) tools. As of 1:20 p.m. ET, Chegg stock was down by a stunning 49.3% and had hit a six-year low.

So what

In the first quarter, Chegg generated net revenue of $187.6 million, ahead of management's guidance range of $184 million to $186 million. Moreover, management had been guiding for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in the $53 million to $55 million range, but outperformed with adjusted EBITDA of $57.6 million.

Chegg offers services -- including subscription services -- that help students with their studies. As of the end of 2022, Chegg had 8.2 million subscribers, which was up 5% from 2021. However, in Q1, the company's subscriber base fell to 8.1 million. 

That might not sound like much of a decline. But commentary from Chegg's management instilled fear in the market. CEO Dan Rosenweig said: "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."

ChatGPT is the AI chatbot developed by OpenAI, which is deploying it in partnership with Microsoft. It has captured the attention of mainstream media and investors alike. And now, it appears many students are asking the chatbot for help with their assignments instead of subscribing to Chegg.

Now what

Chegg's management does have chatbot plans of its own. In April, the company announced "CheggMate" -- an AI chatbot that it's building in partnership with OpenAI and using ChatGPT's technology. The beta launch of CheggMate is expected later this month.

This tactic could help Chegg stay on the right side of innovation. However, it's worth noting that CheggMate isn't expected to help the company in the second quarter. In Q2, management expects net revenues of $175 million to $178 million, a roughly 9% year-over-year decline.

It's possible that investors' fears -- and Tuesday's steep stock price decline -- are overblown. However, it's also true that Chegg now has to navigate through a period of rapid innovations in the learning space, which presents a new layer of risk for the company.