On Monday, Chegg (NYSE:CHGG) announced that it was laying off 4% of its workforce and using the cost savings to execute its AI strategy. Chegg has been one of the top “AI losers,” or companies that see their business model threatened due to the rise of AI chatbots like ChatGPT. This effort is part of a company-wide reorganization to adapt to the breakthroughs seen in the AI space.
However, some wonder if the company is moving too late after seeing a 48% drop in subscriptions last quarter, to which the market called Chegg a 50% drop in share price overnight. , mainly motivated by the fear that ChatGPT would disturb a flat-footed Chegg.
Is AI Disrupting Chegg?
Disruption is part of the tech industry. Some companies see it coming and adapt, while others get caught off guard. Many investors fear that ChatGPT and other AI developments will put Chegg to sleep behind the wheel, and the company is only now rushing to act.
Chegg CEO Dan Rosenweig was accused of downplaying the importance of AI after his Q4 2022 conference call after saying: “we are going to follow him, but we have not seen anything” regarding lost ChatGPT customers. As we noted in our February article on Chegg, the company hadn’t made an AI-related acquisition since 2018.
Chegg’s first-quarter earnings results provided little relief to worried investors. The company issued a disappointing forecast, with a forecast of $175 million to $178 million for the second quarter, compared with $196 million expected by Wall Street. But subscribers are the real sticking point. And it shows students fleeing Chegg into the arms of ChatGPT, reporting a 5% year-over-year drop in its subscriber count.
CEO Dan Rosenweig told investors on the earnings conference call that “Since March, we have seen a significant increase in student interest in ChatGPT. We now believe this is impacting our rate of new customer growth. »
Chegg’s subscriber growth is the cornerstone of his business. Sustainable revenue growth for a B2C service company is only possible by increasing its number of subscribers. This is particularly important for a stock whose valuation implies significant future growth. Chegg is barely profitable, reporting just $2.2 million in first-quarter net profit against its $1.2 billion market capitalization.
Wall Street isn’t happy with the stock, as it received a deluge of downgrades. After its first quarter results, companies such as Jeffries, Piper Sandler, Morgan Stanley, Barrington and BMO Capital either downgraded or reduced Chegg’s targets.
Students use Chegg to cheat on their homework and, sometimes, their exams. Chegg is pretty good at that too. Over the years, it has built up a large proprietary database of homework answers based primarily on user contributions.
However, it is precisely these types of proprietary databases that ChatGPT and other AI chatbots threaten to disrupt. Large language models like the ones that power ChatGPT thrive on their ability to use semantic models to give you a satisfying answer. Inaccuracy is an issue but becomes less of an issue with each model update.
In addition to potentially replacing Chegg’s work, ChatGPT can persuasively write college-level essays, act as a study buddy, and provide additional context to confusing issues.
Chegg’s AI Strategy
Despite accusations of missing the boat on AI earlier this year, Chegg is now actively pursuing AI opportunities, going so far as to shift the company’s strategy in that direction.
The company’s first step is the release of CheggMate, an AI study companion based on OpenAI’s GPT-4. The bot will create mock exams; study plans and act as a virtual assistant for students. CheggMate is currently in free beta with a waiting list.
While many companies release copycat chatbots that are essentially frontends for OpenAI’s API, Chegg’s has the potential to differentiate itself. CheggMate is trained on Chegg’s huge proprietary homework and exam database, making it uniquely equipped to handle student problems.
With the company’s recent announcement of reorganization-focused layoffs to better focus on AI, Chegg has the potential to save itself from disruption. But is it too little, too late?
Check out MarketBeat’s MarketRank predictions for Chegg:
