EdTech Chegg's shares fall 48% as ChatGPT's rise dents its growth

Homework help company started to feel the pinch in March as interest swelled in generative AI sensation

Education technology company Chegg says it remains positive about the effects of AI on its business. Bloomberg

Shares of US education technology company Chegg plummeted after it said the emergence of ChatGPT dented its growth in the first quarter.

Generative AI did not affect the homework help company in a noticeable manner at the start of this year and it was expecting to welcome subscribers, but things changed in March with a “significant spike” in interest in Microsoft-backed ChatGPT, said Dan Rosensweig, Chegg's chief executive and president.

The disclosure dragged its share price down by more than 48 per cent to $9.08 at market close on Tuesday. The stock price is down 64.3 per cent since the start of 2023.

“Generative AI and large language models are going to affect society and business, both positively and negatively, at a faster pace than people are used to,” he said.

Chegg, however, will use the effects of ChatGPT to its advantage, Mr Rosensweig said.

“Education is already being impacted and, over time, we believe that this will advantage Chegg,” he said.

“We continue to see very strong retention rates, suggesting that those students who already understand the value of Chegg continue to choose us and retain us at high rates.

“We are also expecting a positive recovery in enrolment trends, which historically would be good news for Chegg.”

Despite the effects of ChatGPT, Chegg was able to beat estimates for both revenue and earnings before interest, taxes, depreciation and amortisation.

Net revenue in the three months that ended in March declined 7.2 per cent to $187.6 million, from $202.2 million a year ago, while ebitda dropped 7.4 per cent to $57.6 million, from $62.2 million last year, Chegg said in its financial results release.

Net income slid nearly 62 per cent to $2.2 million, from $5.74 million a year ago.

Generative AI is emerging as the latest battlefield for tech companies seeking advantage from the technology.

It can produce data including audio, code, images, text, simulations, 3D objects and videos. While it takes cues from existing data, it is also capable of generating new and unexpected output, according to GenerativeAI.net.

ChatGPT, developed by Microsoft-backed OpenAI, rose to prominence because of its advanced conversational capabilities, and has been effective for writing essays, creating code and even answering patient questions more emphatically than doctors.

Its emergence kicked off a generative AI arms race, with Google releasing Bard in February. Twitter chief executive Elon Musk also said he was planning to develop a “truth-seeking” platform to rival OpenAI and Google, and Apple is reportedly working on improving its digital assistant Siri to catch up.

In education, generative AI can play an important role in activities such as content creation, grammar checks, research, language learning and homework, aside from its ability to be available from anywhere, according to industry platform AIMultiple.

However, there are concerns that the technology will replace human jobs and services, particularly those that are mundane and repetitive, especially if it means saving costs for companies.

Roughly 18 per cent of work globally could be automated by AI, with a bigger impact on developed than emerging markets, Goldman Sachs said in a March report.

About one in four jobs is expected to change in the next five years as generative AI “comes of age” and the green economy takes root, creating and destroying millions of jobs in the process, the World Economic Forum said recently.

In the US, white-collar workers earning up to $80,000 a year are expected to be those most likely to be affected by AI, according to a March study from OpenAI and the University of Pennsylvania.

It’s too early to tell how this will play out. We believe that it’s prudent to be more cautious with our forward outlook

Dan Rosensweig,
chief executive and president of Chegg

Geoffrey Hinton, considered the “godfather of AI”, has warned of the effects of AI, after leaving Google following a decade-long stint with the Bard developer.

Chegg remains optimistic, however, citing its own survey that showed 85 per cent of students prefer to have human experts involved in their studies.

“We believe that the future of learning is a blend of AI technology with human-based support to build trust and ensure accuracy and relevancy,” Mr Rosensweig said.

The company said it expects second-quarter revenue to be between $175 million and $178 million, below a $193.6 million consensus analyst estimate from FactSet.

“It’s too early to tell how this will play out. We believe that it’s prudent to be more cautious with our forward outlook,” Mr Rosensweig said.