Chegg (CHGG 3.20%) runs an online learning platform that helps students with homework problems, among other services. The company has been somewhat successful, but the recent rise of AI chatbots like ChatGPT seems to have changed its prospects in the eyes of investors.
That's why Chegg's stock is down by 62% this year, even as the broader market is recovering from last year's downturn. But at the shares' current levels, bulls might say they could be a steal. Are the bulls right? Let's look at both sides of the argument.
The bull case
Education is arguably one of the most essential activities for people during their early years up to young adulthood. And adults often seek more education to advance their careers. Chegg is important for students of all ages in helping them study smarter. It offers homework help, solutions to textbook problems prepared by subject-matter experts, and more through its subscription service.
One of the platform's appeals is that it creates a network effect, whereby students increasingly turn to it as more experts join in to answer questions, and vice versa. Also, once solutions to a textbook problem are published on the website, they can remain on the platform forever. The student who originally asked the question won't be the only one to benefit.
In other words, Chegg has built and continues building a library of textbook answers that can benefit future students. That's why the company has found some success despite competition from somewhat similar platforms, such as Course Hero.
Now, with the threat from AI chatbots that can also answer homework questions and even help students write essays (Chegg does offer writing help), the company is trying to get ahead of the problem by using ChatGPT to its advantage. It recently announced CheggMate, an AI-powered study helper.
CheggMate will be powered by GPT-4, the most advanced version so far of the AI tool taking the world by storm. The company did not explicitly say when it would launch CheggMate although students have had the opportunity to sign up to test an early version of this new service since May.
The company says that while 77% of students are excited about an AI tool to help them study, 85% of them want it to be paired with the help of human experts. Chegg will seek to provide exactly that. The introduction of CheggMate, which will be curated by experts for accuracy, will give students the AI help they want while still having access to Chegg's library of homework content.
The company hopes this new tool will help it make headway into its vast addressable market. The company estimates that there are 100 million students worldwide it could still target with its services.
Chegg ended the first quarter with just 5.1 million subscription members, a decrease of 5% year over year. With the market skeptical that it can bounce back, the company's shares could deliver outsize returns for investors who get in at current levels, provided CheggMate helps the company fend off the threat from AI.
The bear case
It is great that Chegg is finding ways to stay relevant, but CheggMate remains an unknown quantity. At this point, knowing how successful it will be is difficult. Management said in the press release announcing its first-quarter results that ChatGPT and student interest in AI have affected subscription growth since March.
That probably had a relatively mild effect on Chegg's first-quarter results, which still weren't all that great. The company's revenue of $187.6 million decreased by 7% year over year. Subscription service revenue of $168.4 million declined by 3% compared to the year-ago period. And the company's net income of $2.2 million was less than half that of the first quarter of 2022, which was $5.7 million.
In fairness, a shift to remote learning in the earlier days of the pandemic significantly boosted Chegg's business. But with students' habits reverting to their pre-pandemic days, this tailwind is now gone. Perhaps those students who never would have signed up for Chegg if not for the pandemic and its effect on schooling are canceling their subscriptions.
Chegg's business might stabilize eventually, and its financial results could start moving in the right direction again, but that largely depends on whether it will survive the ChatGPT threat and successfully sell its AI-powered service to students. ChatGPT, which can answer many homework questions just fine (GPT-4 did pass the bar exam), could be the death of companies like Chegg.
That's a solid reason to be skeptical of the company's prospects.
The verdict
The next year or so will be crucial for Chegg and its shareholders. We will learn just how much impact ChatGPT has on the company's subscriber growth, whether CheggMate has a chance at success, and much more.
For now, though, Chegg looks far too risky a tech stock for most investors to bother with today. It would be best to stay on the sidelines while keeping an eye on it to see how things unfold.
