Online education company Chegg has been sent to the principals office over the growing use of OpenAIs ChatGPT chatbot by students. The companys shares plummeted over 49% on Tuesday after acknowledging that ChatGPT is starting to hurt its business as more students use free A.I. chatbots for homework instead of paying for its study tools.
In its earnings report on Monday, Chegg said that the impact of ChatGPT started two months ago.
In the first part of the year, we saw no noticeable impact from ChatGPT on our new account growth and we were meeting expectations on new sign-ups, Chegg CEO Dan Rosensweig said during the companys earnings call Monday. However, since March we saw a significant spike in student interest in ChatGPT. We now believe its having an impact on our new customer growth rate.
The company reported a 7% year-over-year drop in its first quarter revenue and withdrew its full-year earnings guidance. For the current quarter, Chegg predicted revenue of $175 million to $178 million, falling well short of FactSets analyst estimates of $193.6 million.
On the bright side, Rosensweig noted that Chegg had a high customer retention rate among students, which could draw more students to its platform in the subsequent quarters. The company offers services like online tutoring, proofreading, and study tools.
But investors are still pessimistic about Chegg in the chatbot era. Its shares tumbled $8.70 to $8.95 in mid-day trading on Tuesday,
On Tuesday, financial services company Jefferies downgraded Chegg because of how A.I. headwinds could affect the edtech companys fundamental story. Despite being popular among students, Chegg may still not be able to keep up with the viral nature of ChatGPT-like tools, according to Jefferies analysts.
While retention rates of CHGGs existing customers remain strong now, we fear that student usage of A.I. tools like ChatGPT could cause a viral sensation around campus (just like CHGG had benefited from), which could increase churn in the coming quarters, Jefferies analysts wrote in a Tuesday note, using Cheggs stock ticker.
The investment bank also worries that with the growing popularity of some A.I. services, Cheggs core offering could become extinct as consumers experiment with free A.I. tools. In other words, students could opt for ChatGPT or similar A.I. tools to supplement their study rather than using Cheggs paid services that cost roughly $20 monthly.
In an effort to compete, Chegg has embraced A.I. by collaborating with the same company causing the slowdown in its customer growthOpenAI. Through a service called CheggMate announced last month and powered by OpenAIs technology, Chegg hopes to provide tailor-made study suggestions to its students. The company plans to provide limited access to the tool later this month.
But even after the A.I. tool debuts, its uncertain whether it will be Cheggs savior, Morgan Stanley analyst Josh Baer said.
The optimistic scenario of the new AI powered Cheggmate solution insulating Chegg from external risks is highly unlikely, according to a research note by the bank on Tuesday.
Other analysts doubt that Cheggs A.I.-powered study tool will make much of a difference to the companys short-term finances.
While CHGG plans to launch the CheggMate beta this month to a select few, the timing of a full launch is unclear, Jeffries analysts wrote in their Tuesday note, adding that they dont expect any meaningful impact from CheggMate until fiscal year of 2024. The analysts wrote that Cheggs management is still figuring out how to monetize CheggMate, but the first step would be to include its advanced A.I.-powered features on its existing products.
Whatever the case, the Santa Clara, Calif.-based company still thinks its CheggMate service can win against general-purpose A.I. chatbots. CheggMate said its service will give students an experience unique from ChatGPT, as it will present the edtech companys own content and data.
Weve defeated all the free sites in the past pretty handily over time and we expect that with CheggMate we will have great success going forward, Rosensweig said during Cheggs earnings call.
Ultimately, we believe the introduction of CheggMate will lead to an increase in the size of the market we serve and strengthen our relationship with our users, while reducing content costs, Rosensweig said.
Chegg and OpenAI did not immediately return Fortunes request for comment.
