chegg stock drops sharply after warning that ai is a threat to customer growth

Market participants are dumping Chegg stock en-masse this morning after the company’s Chief Executive Officer, Dan Rosensweig, warned that artificial intelligence is having a direct impact on the firm’s customer growth rates.

Thus far in today’s stock trading session, Chegg (CHGG) stock is down nearly 49% at $9 per share. Including today’s sharp drop, shares of the e-learning company have shed almost two-thirds of their value since the year started.

These remarks were delivered in the press release that showcased the firm’s financial results covering the first quarter of 2023 and they appear to have spooked investors despite the fact that Chegg believes that – in the big picture – AI will be a positive technological development for its learning platform.

Chegg’s Subscribership Seems to Have Dropped by 3 Million Compared to Q4 2022

By the end of the first quarter, Chegg had 5.1 million subscribers resulting in a 5% year-on-year decline. Meanwhile, the company reported a 3% drop in its subscription revenues compared to a year ago to $168.4 million. This income source accounted for 90% of Chegg’s revenues for the period.

The platform’s subscribership figures this quarter (5.1 million) may have been what caused today’s sharp drop in the stock price as it represents a 3 million drop compared to the number reported by Chegg by the end of 2022.

Users may have realized that they can rely on AI-powered chatbots like ChatGPT, Anthropic’s Claude, or other similar software to learn about different topics. This drop was not directly addressed by the management in the prepared remarks published today.

In regards to the AI race, Rosensweig asserted: “we believe that 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 added that the education industry is already being impacted and that AI advancements should play in favor of Chegg’s business model.

The overall opinion of Rosensweig was, however, somehow ambiguous as he acknowledged that ChatGPT and other similar solutions were already impacting his firm’s ability to grow its customer base.

In response to the uncertainty associated with this particular subject, the firm decided to take a conservative approach and only provide guidance for its next fiscal quarter in terms of revenues and other financial metrics.

CheggMate is the Company’s Bet to Use AI in Its Favor

The company is betting heavily on the success of CheggMate to ride the AI wave instead of being run over by it. It remains to be seen if they will be successful at doing so. The management was cautious during the earnings call not to overexcite anyone about the prospects of this application as they believe it is too early to tell how things will play out.

About this lack of short-term visibility, CEO Rosensweig weighed: “when ChatGPT came out in March, it just did another bump of usage and we’re just being smart because we really won’t know anything until the end of August early September, because this summer doesn’t really reveal anything. So that’s it”.

Rosensweig highlighted that Chegg is “aggressively and immediately” embracing AI and this is reflected by the launch of CheggMate, a proprietary solution powered by OpenAI’s most powerful large language model (LLM) to date – GPT-4 – that creates personalized pathways of learning for Chegg’s students.

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In addition, the solution can be used to get clarification on the topics and courses that are being studied and further expand on concepts that the student is having a hard time understanding.

“CheggMate will enable students to have an instantaneous AI conversation that is personalized to their learning style and needs, supported by our substantial proven and reliable content library. CheggMate combines the best of AI and Chegg’s student-focused expertise and will be exclusively available on Chegg’s platform”, Rosensweig commented back in mid-April when the product was released.

The solution is only available in nine countries at the moment. The price has not been defined just yet as the solution is still in invite-only mode but the management shared during today’s earnings call that the price could range from $15.95 to $19.95 per month and may even opt to introduce a $24.95 premium tier.

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