Amid another weak opening on Wall Street, education technology firm Chegg (NYSE:CHGG) suffered a devastating blow, falling 15% on Wednesday. Making a name for itself in recent years through its online tutoring business, Chegg now faces competition from ChatGPT, an artificial intelligence-driven chatbot. Because of the disruption risk, analysts issued a cautionary take on CHGG stock.
Developed by AI technology research and deployment firm OpenAI, ChatGPT drew much praise from industry experts. Perhaps most notably, software giant Microsoft (NASDAQ:MSFT) invested in OpenAI. Earlier this week, the company announced that it will give more of its customers access to ChatGPT through its cloud-hosting tool Azure OpenAI Service.
Given the ability to disrupt currently established players in the broader AI ecosystem, covering analysts remain pensive about CHGG stock. Conspicuously, Needham analyst Ryan MacDonald downgraded shares to “hold” from “buy.” In a research note, MacDonald stated that Chegg features limited near-term growth prospects.
“Our analysis of FY22 growth trends across Chegg Services subs, [average revenue per user], and [Chegg-acquired language learning platform] Busuu suggests the FY23 consensus estimate of 9.2% y/y Chegg Services rev growth is too high,” wrote MacDonald.
Further, BMO Capital Markets Jeffrey Silber chimed in, stating that while it’s too early to ascertain how ChatGPT may impact CHGG stock, Chegg’s U.S. web traffic weakened throughout the fourth quarter. Silber currently rates the education tech company a “hold,” an assessment assigned on Tuesday.
CHGG Stock Faces Significant Challenges Ahead
To be fair, Chegg’s leadership team didn’t broadcast any overtly anxious messaging. Per a Barron’s write-up, Chegg Chief Financial Officer Andrew Brown acknowledged that the ChatGPT featured “particularly good” technology at a Needham-sponsored conference this month. However, Brown also stated that ChatGPT lacked the rigor to address more complex math problems, describing this arena as core to CHGG stock.
Nevertheless, the fundamental issue for Chegg is that tech never sleeps. As advancements in AI-driven protocols rise in magnitude and relevancy, CHGG stock faces massive disturbance in the online tutoring business.
Moreover, OpenAI’s partners own a clear vested interest in seeing ChatGPT become the dominant force in practical AI architectures. In particular, Microsoft intends to integrate the tool into its Bing search engine, which might upset the Google ecosystem under Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL).
Currently, Microsoft’s Bing ranks second in terms of global search engine market share. However, this is about as distant of a second-place ranking as one can get, with Google rising above all others at 92.58% market share. In sharp contrast, Bing comes in at just a hair over 3%.
Still, if ChatGPT consistently delivers superior results, Bing may be able to chip away at Google’s search engine hegemony. One of the core benefits of the ChatGPT platform centers on intuitive interaction. Essentially, users can engage the AI model in a conversational manner, potentially catalyzing more favorable usability.
Why It Matters
In 2021, Chegg’s total net revenue came out to $776.3 million, representing an increase of 20% year-over-year. Moreover, the Chegg Services revenue increased 29% YOY. However, at $669.9 million, this segment accounts for 86% of total sales, an increase from 81% in 2020.
In other words, should ChatGPT gain further prominence, the impact could be catastrophic for CHGG stock. Therefore, it’s not terribly surprising why the market responded so negatively today.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
