Chegg Stock Dives on Impact of Free AI Tools


Shares of Chegg Inc. (NYSE:CHGG) nosedived on Tuesday as the proliferation of free artificial intelligence tools has impeded growth at the online education company.

In its first-quarter release late Monday, Chegg anticipated sequential declines in total net revenue, gross margins, and profits for the current quarter, prompting a sharp sell-off.

Following the earnings announcement, the stock tumbled over 20% on Tuesday morning, coinciding with the revelation that Nathan Schultz will succeed Dan Rosensweig as CEO, with Rosensweig assuming the role of executive chairman.

Chegg’s stock has endured a tumultuous journey, shedding nearly 70% over the past year and halving in value in 2024 alone. Since its zenith in 2021, the stock has plummeted by over 95%. Additionally, the company has witnessed consecutive declines in year-over-year subscribers since the debut of ChatGPT in late 2022.

In response to the latest developments, Jefferies analyst Brent Thill downgraded the stock to Underperform from Hold, lowering the price target to $4 from $7, expressing concerns about Chegg’s deteriorating trajectory.

Thill remarked, “We question if Chegg can build an AI experience that is meaningfully better than free alternatives that students will be willing to pay for.” He highlighted the formidable challenge posed by free AI solutions, presenting a credible alternative to Chegg’s paid subscriptions.

Once hailed as a pandemic-era success story amid the shift to online education, Chegg’s fortunes have reversed as students returned to traditional classrooms and free AI tools gained prominence, precipitating a decline in revenue and stock value.

In May 2023, Chegg acknowledged a surge in student interest in ChatGPT, attributing it to a dampening effect on new customer growth rates—a trend persisting to date.

Chegg’s first-quarter revenue for 2024 amounted to $174.4 million, marking a 7% decrease from the same period last year and nearly 14% lower than the first quarter of 2022.

Rosensweig remains optimistic about AI’s potential to bolster Chegg’s prospects, envisioning its integration into the company’s offerings over the coming years.

“We’ve embraced AI and have completely rebuilt our user experience and services, rolling out a multiyear product-led growth plan to emerge from the post-COVID period and return to revenue and profit growth,” Rosensweig affirmed during the earnings call.

Despite the challenges ahead, Chegg is optimistic about the transformative impact of AI, anticipating broader student engagement and enhanced services in the future.

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