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.
How Tesla’s price correction has hit fund managers
Investing in disruptive technology can be a bumpy ride, as investors in Tesla were reminded on Friday, when its stock dropped 7.5 per cent in early trading to $575.
It recovered slightly but still ended the week 15 per cent lower and is down a third from its all-time high of $883 on January 26. The electric car maker’s market cap fell from $834 billion to about $567bn in that time, a drop of an astonishing $267bn, and a blow for those who bought Tesla stock late.
The collapse also hit fund managers that have gone big on Tesla, notably the UK-based Scottish Mortgage Investment Trust and Cathie Wood’s ARK Innovation ETF.
Tesla is the top holding in both funds, making up a hefty 10 per cent of total assets under management. Both funds have fallen by a quarter in the past month.
Matt Weller, global head of market research at GAIN Capital, recently warned that Tesla founder Elon Musk had “flown a bit too close to the sun”, after getting carried away by investing $1.5bn of the company’s money in Bitcoin.
He also predicted Tesla’s sales could struggle as traditional auto manufacturers ramp up electric car production, destroying its first mover advantage.
AJ Bell’s Russ Mould warns that many investors buy tech stocks when earnings forecasts are rising, almost regardless of valuation. “When it works, it really works. But when it goes wrong, elevated valuations leave little or no downside protection.”
A Tesla correction was probably baked in after last year’s astonishing share price surge, and many investors will see this as an opportunity to load up at a reduced price.
Dramatic swings are to be expected when investing in disruptive technology, as Ms Wood at ARK makes clear.
Every week, she sends subscribers a commentary listing “stocks in our strategies that have appreciated or dropped more than 15 per cent in a day” during the week.
Her latest commentary, issued on Friday, showed seven stocks displaying extreme volatility, led by ExOne, a leader in binder jetting 3D printing technology. It jumped 24 per cent, boosted by news that fellow 3D printing specialist Stratasys had beaten fourth-quarter revenues and earnings expectations, seen as good news for the sector.
By contrast, computational drug and material discovery company Schrödinger fell 27 per cent after quarterly and full-year results showed its core software sales and drug development pipeline slowing.
Despite that setback, Ms Wood remains positive, arguing that its “medicinal chemistry platform offers a powerful and unique view into chemical space”.
In her weekly video view, she remains bullish, stating that: “We are on the right side of change, and disruptive innovation is going to deliver exponential growth trajectories for many of our companies, in fact, most of them.”
Ms Wood remains committed to Tesla as she expects global electric car sales to compound at an average annual rate of 82 per cent for the next five years.
She said these are so “enormous that some people find them unbelievable”, and argues that this scepticism, especially among institutional investors, “festers” and creates a great opportunity for ARK.
Only you can decide whether you are a believer or a festering sceptic. If it’s the former, then buckle up.
The biog
DOB: 25/12/92
Marital status: Single
Education: Post-graduate diploma in UAE Diplomacy and External Affairs at the Emirates Diplomatic Academy in Abu Dhabi
Hobbies: I love fencing, I used to fence at the MK Fencing Academy but I want to start again. I also love reading and writing
Lifelong goal: My dream is to be a state minister
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