Editor's note: This article has been clarified. Chegg reports a "Skills and other" segment and the company says it saw "strong growth in Skills, offset primarily by the change in required materials model, which is now a revenue share."
Artificial intelligence (AI) is already changing the game for companies. Many are integrating AI language models into their existing businesses, while others expect AI to replace jobs that humans have historically performed.
But AI can threaten companies, too. Learning platform Chegg (CHGG 1.88%) spooked investors when it acknowledged that a recent surge in students pursuing ChatGPT had begun hurting its business.
Shares have shed nearly 40% in just days. Is Chegg facing an existential threat, or is this a near-term scare and buying opportunity for the long-term investor?
Here is what you need to know.
How is ChatGPT affecting Chegg?
Chegg is a digital learning platform for students. The company sells subscriptions to students, giving them access to learning tools, textbooks, e-books, and more. Through Chegg Skills, individuals can learn skills and trades like IT, security, and software engineering.
ChatGPT is an AI chatbot that can gather information on the web and respond to user queries in a conversational manner. It was launched in late 2022 but has become the internet's fastest-growing app in months. The question has become: Do students need Chegg's services if one can ask ChatGPT a question and get a complete answer? ChatGPT can even write essays and software code.
The company recently reported first-quarter earnings, posting a 7% year-over-year revenue decline. The company reported a 34% year-over-year decline in revenue in its "Skills and other" segment, noting that the segment's performance was "driven by strong growth in Skills, offset primarily by the change in required materials model, which is now a revenue share." Subscribers fell by 5%.
Management noted on the earnings call that student interest in ChatGPT surged in March, the last month in the quarter, which implies that ChatGPT's impact was felt quickly.
Interestingly, management guided for $175 million to $178 million in second-quarter revenue, roughly flat with the second quarter of 2022. Investors will anxiously await the next earnings report; a miss on guidance could shake investor confidence further as a sign Chegg is struggling to fend off ChatGPT's influence.
How concerned should investors be?
Investors should never panic; it only creates impulse buying and selling. But there are some essential takeaways to chew on. First, management pointed at ChatGPT as a reason for disappointing earnings results, but the company's revenue growth has steadily slowed since early 2021. That's an overhanging problem that investors should focus on, perhaps more than ChatGPT itself.
CHGG Revenue (Quarterly YoY Growth) data by YCharts. YoY = year over year.
Next, management's revenue guidance for the second quarter signals an expected steadying of the ship. If management misses guidance, especially by a large figure, it would further validate ChatGPT's impact and give shareholders more justification for selling the stock. Put differently, one shouldn't overreact based on one month of ChatGPT hype -- but the company is not out of the woods, either.
Chegg is even leaning into AI, launching CheggMate. This ChatGPT-powered learning tool seeks to persuade students to use AI within Chegg's subscription service and not from elsewhere. Again, time will tell how successful this is, and it's too early to draw any conclusions.
There is good news
So where does Chegg stand? The company's long-term outlook is a bit hazier than it was a couple of weeks ago. Still, investors should get some additional information over the next few quarters when you can start seeing trends in the business post-ChatGPT.
Investors should consider ChatGPT a legitimate threat to the business, but there could still be an investment opportunity. Analysts have slashed their expectations for Chegg's earnings growth but still expect double-digit profit growth over the long term. Meanwhile, the market has valued the stock at a price-to-earnings ratio (P/E) of just 7.5, a likely bargain if Chegg is on solid footing a year or two from now.
CHGG PE Ratio data by YCharts.
If the ChatGPT hype cools or Chegg instills confidence in investors that it can grow despite ChatGPT (or even better, if CheggMate becomes a success), the stock's potential re-rating to its former valuation would create some great investment returns for anyone buying during this time of uncertainty.
Chegg stock offers a potential reward, but it's a roll of the dice on limited information. Whether that's an opportunity or a red flag depends on how investors see it.
