Education company Chegg (CHGG 1.03%) saw its stock get nearly cut in half on Tuesday, following the company's first-quarter earnings release. The dramatic fall in the stock price came as Chegg used the earnings report to warn that it believed that artificial intelligence (AI) chatbot ChatGPT is having a negative impact on the company's growth rate in new customers.
But is the stock's massive decline an overreaction? Chegg CEO Dan Rosensweig thinks so -- and he's probably right.
What Chegg said about ChatGPT
First and foremost, it's worth noting that Chegg performed exceptionally well in Q1. First-quarter revenue rose 7% year over year to $187.6 million. This top-line figure came in ahead of analysts' consensus forecast for revenue of $185.2 million. Adjusted earnings per share of $0.27 was also better than analysts' average estimate for $0.26.
"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 explained in the company's earnings release.
The issue for Chegg began in March, when the buzz around ChatGPT started leading to lower-than-expected new customer acquisition for the education company, which offers a variety of education services including one that gives paying customers access to expert solutions for homework and studying. A "significant spike in student interest in ChatGPT" in March, Rosensweig noted in the company's quarterly update, seemed to become a headwind for Chegg's new account sign-ups for its subscription services. But its impact was small on its overall business, as Chegg continues "to see very strong retention rates."
Given the uncertainty surrounding ChatGPT's near-term impact on its business, management is opting to be "cautious" about its guidance. To this end, Chegg only provided second-quarter guidance while refraining from providing an update on its full-year outlook.
For its second quarter, Chegg said it expected revenue to be between $175 million and $178 million. The midpoint of this range implies a 9% year-over-year decline. Management also guided for second-quarter adjusted earnings before interest taxes, depreciation, and amortization (EBITDA) to be between $53 million and $55 million.
Chegg stock's decline is "extraordinarily overblown"
Rosensweig explained in a CNBC interview on Tuesday that he believed the stock's reaction to his remarks about ChatGPT was "extraordinarily overblown." He noted that the company is still signing up "millions of new customers."
But investors should note that Chegg management also believes artificial intelligence will be a boon for its business in the long term. Indeed, the company is putting its money where its mouth is; Chegg recently announced its own chatbot called CheggMate, which harnesses both its own proprietary data and the power of ChatGPT "to make learning more personalized, adaptive, accurate, fast, and effective -- all in an easy to use and conversational manner," the company explained in its earnings release. Importantly, CheggMate will keep its own data proprietary. Rosensweig called artificial intelligence a "platform shift" akin to "the creation of the internet," "the explosion of mobile," and "the movement of software to the cloud."
While CheggMate isn't slated to launch until May, Rosensweig reminded investors during his CNBC interview that ChatGPT's answers are often inaccurate; "One of the things that people need to understand is students can't be wrong when they do homework or when they learn things," the CEO said.
Finally, investors should note that Chegg is a profitable company with significantly more cash than debt. With a market capitalization of just over $1 billion after the stock's sell-off, shares have a lot of potential over the long haul -- especially if AI transforms into a catalyst for its business over time.
