If you had never heard of ChatGPT before today and tuned in for Chegg’s (CHGG) Q1 2023 results, you would have thought the company behind the country’s leading education and online study platform had delivered a reasonably successful quarter.
Sure, the guidance wasn’t great, but the results weren't so bad that you expected the share price to lose half its value in a single morning of trading, but that's precisely what happened Tuesday.
Chegg Management admitted that the generative AI platform ChatGPT received a lot of interest from its students, causing investors to speculate its business model was ready to implode.
“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. However, since March we saw a significant spike in student interest in ChatGPT. We now believe it’s having an impact on our new customer growth rate,” stated its Q1 2023 press release.
So, the question for investors is: Has Chegg chugged its last breath? Or does it have a pathway through this AI conundrum?
Let’s consider both sides of the argument.
It Can Leverage Its Position Within Online Study Community
The one thing we’ve learned about ChatGPT, and even ChatGPT4, is that it’s not the Holy Grail of information. It does make mistakes. Chegg CEO Dan Rosensweig mentioned one of Chegg’s significant advantages in the company’s press release.
“We believe we are in the best position to take advantage of the advancements in AI for the benefit of students, because we can leverage our proprietary data, our 150,000+ experts, and our decade-plus years of experience as we launch CheggMate,” Rosensweig stated.
As recently as February 2021, Chegg had a market cap of over $15 billion, 15x where it is today, just 26 months later.
Let's assume that Chegg was incredibly overvalued early in 2021. At the end of 202o, it had revenue of $644.3 million. That’s a price-to-sales ratio of 23.6x, the highest multiple since it went public in November 2013.
When Chegg went public, it had 2012 revenue of $213 million. Based on an IPO valuation of $1.02 billion, it had a P/S ratio of 4.8x. I’m sure some investors felt that was outrageously high at the time. However, after today’s haircut, you’re getting the business for the same market cap as in 2013, only it has nearly 4x the revenue.
Over the past decade (2012-2022), Chegg’s grown its revenue in seven out of 10 years. In the early part of the past decade, Chegg lost considerable money. The fact it continues to deliver some (albeit slender) profits is a testament to its management finding a way to win.
Google VP Geoffrey Hinton, dubbed the “Godfather of AI,” recently quit the company to devote his full time to ensuring the technology doesn’t get into the wrong hands. Misinformation is already a global menace. Such educators like Chegg have a vested interest in ensuring Hinton succeeds in his new work.
If anything, I think investors are dramatically undervaluing Chegg’s part to play in the future of AI in the education and tutorial process.
Aggressive investors ought to be licking their chops at current prices. CHGG stock last traded this low in 2017. The Loss of Chegg’s Reason for Being
Investors scrambling for the exits today do so because they believe management has admitted that ChatGPT could eliminate the need for Chegg’s products and services.
There is no question the company's newest product, CheggMate, will be crucial to its future growth. However, the exciting part about its generative AI platform is that it partners with OpenAI, the people behind ChatGPT.
Chegg launched CheggMate in mid-April. The company’s argument for it being successful is that it marries the best of AI with its massive database of education experts. Ultimately, it believes this combination provides its students with the best learning experience.
“We believe AI has the potential to provide tailored learning experiences to everyone and improve the way people around the world learn,” said Sam Altman, CEO of OpenAI, in CheggMate’s press release. “We are very excited to work with Chegg, given their history as the leading student-first learning platform.”
I can see where this is going.
Chegg’s stock price continues to get beat down on negative sentiment until Microsoft (MSFT) rides in to save the company from the dustbin of American business history.
The tech giant announced in early 2023 that it was investing $10 billion in OpenAI. So it makes almost no sense for OpenAI to partner with Chegg if it didn’t believe the partnership made sense.
Looking at Chegg’s options volume on Tuesday, I’m surprised there’s no more unusual options activity on its stock. That said, today's volume is 10x the 30-day average, so bets are being made.
I’ve followed Chegg for a long time. Unfortunately, it’s been written off several times in the past five years. This is one more instance where investors have made the obvious call on its shares, but not necessarily correct.
If you’re aggressive, I like the idea of selling the Jan. 19/2024 $7.50 puts. They’ve got 262 days to expiration, providing investors with an annualized yield of 17.9%. The shares would have to fall below $6.35 before next January to lose money on this trade.
As dire as some see the situation, I don’t think it’s that bad. Chegg will be bought out before it gets to that.
No, Chegg has not chugged its last breath. Not by a long shot.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
