Artificial intelligence (AI) has been grabbing plenty of headlines recently, thanks to the rise of ChatGPT. And while many companies are benefiting from the craze, others haven't been so lucky. Online learning platform Chegg (CHGG 3.20%) is in the latter category, which isn't surprising. Chegg specializes in providing students with expert answers to textbook and homework problems, something apps like ChatGPT could make obsolete.
Still, management believes it can leverage AI to make its services even more valuable for students. If so, Chegg could benefit from AI in the long run, and the recent sell-off is far overdone. Chegg's shares are down by almost 60% year to date. That said, let's dig in a little deeper and decide whether investing in Chegg's stock right now is worth it.
Looking at Chegg's first-quarter results
Chegg's business has changed over the past year and a half. Notably, the company divested its required materials business, which included print textbook rental services. Almost all of Chegg's revenue is now coming from the higher-margin subscription service, which features assistance with homework, writing, math, and more.
In the first quarter, the company's revenue declined by 7% year over year to $187.6 million. Chegg's subscription service revenue declined by 3% year over year to $168.4 million, accounting for about 90% of its top line. The company had 5.1 million subscribers as of the end of the quarter, a decline of 5% year over year. Chegg's net income per share dropped to $0.02, down from $0.04.
According to Chegg's management, student interest in AI had no impact on subscription growth for most of the first quarter, that is, until March, when interest in ChatGPT skyrocketed among students, thereby impacting the company's new sign-ups. Meanwhile, the company expects revenue between $175 million and $178 million in the second quarter. Even at the high end of this estimate, it would represent a year-over-year decline of 8.6%.
With unimpressive financial results and pressure from ChatGPT, Chegg's stock could remain volatile in the short run. But that's where Chegg's plan to turn AI into an asset comes into play.
What does the future hold?
In mid-April, Chegg announced CheggMate, a new AI-powered service designed to help students even more than its existing subscription option. CheggMate uses GPT-4, the latest model of the AI chatbot taking the world by storm. Notably, GPT-4 is much more advanced than previous iterations and, among other things, successfully passed the bar exam.
Still, AI isn't infallible, it lacks a human touch, and Chegg believes it can better serve students when paired with the help of a human expert. According to a study by the company, 77% of Chegg's customers said they would like AI-based learning support, and 85% said they would prefer it if it is complemented by human expertise. Even beyond Chegg subscribers, many students are already using ChatGPT, sometimes in not-so-honest ways.
Presumably, there is nothing wrong with using the chatbot -- or a service that is powered by it -- as a learning tool. That's what CheggMate promises to be. And if successful, it could help Chegg make tremendous progress in its addressable market. The company has estimated that 100 million students could benefit from its services worldwide. Here is the flip side: AI's potential as a learning tool is so obvious that, in my view, many competitors will rise and try to eat Chegg's lunch.
Chegg has already developed a reputation in its niche and has so far been relatively successful, even with alternative platforms like the privately held Coursehero. Still, the rise of AI makes the company's future highly uncertain, even with its new CheggMate service. At the very least, investors should wait until CheggMate proves it can consistently attract new subscribers and help Chegg's revenue move in the right direction before initiating a position.
But for now, the tech stock doesn't look like an attractive stock to buy.
