Just a few years ago, education technology company Chegg (CHGG) was among the stock market's pandemic darlings - along with stay-at-home names like Peloton (PTON), Zoom (ZM), and Netflix (NFLX) - as many schools shifted to an online learning model. However, the easing of COVID-related restrictions eventually wiped out all the pandemic-related gains from shares of this integrated student learning platform.
Adding to the stock's woes, the rapid mainstream adoption of generative artificial intelligence (AI) tools like ChatGPT have recently emerged as a serious threat to Chegg's business model.
CHGG is now down 87.9% from its two-year high, and the shares have lost 58.7% in 2023 alone. The stock is underperforming the S&P 500 Index ($SPX), up more than 17% year-to-date, by a considerable margin.
Now that Chegg shares have given up more than half their value in 2023, is the stock a good value at current levels - or is there more downside yet to come? As the company prepares to report Q2 earnings, let's take a closer look at the concerns priced into CHGG already, and what might be next for the stock.
AI: Boon or Bane for Chegg?
Chegg stock dropped more than 48% in one day a few months ago after the company revealed that ChatGPT negatively impacted its first-quarter growth. Even though the company clarified that its AI rival was so far only affecting new account growth and its retention rates remained very high, that wasn’t enough to stop investors from dumping the stock.
While the rise of ChatGPT might be a risk, the company has been leveraging AI and machine learning within its own platform to help drive future growth. Chegg currently uses third-party and proprietary AI models to increase the speed and quality of its services, support its writing products, and reduce content development costs.
Chegg is also developing CheggMate, its AI-powered learning aide, which is built on the very same tech that powers ChatGPT. The company intends to combine the conversational nature of ChatGPT with Chegg's own proprietary data and subject matter experts to make CheggMate a powerful and distinctive learning tool.
While Chegg is aggressively embracing AI technology, it remains to be seen how the evolution and adoption of ChatGPT as a standalone tool will play out for the company, which adds significant uncertainty to its near-term outlook.
Looking Beyond AI
Outside the AI space, Chegg recently introduced partner offerings from DoorDash (DASH) and Calm. In its first-quarter report, the company said, “we are seeing the benefits of adding non-academic content to our subscriptions with improved retention,” and investors may be looking for evidence of this in the upcoming second-quarter results.
Chegg is also focused on localized content and pricing in the international market, which could act as a growth catalyst to help the company expand in new geographic markets and build its user base.
For example, to capture customers during the peak back-to-school season, Chegg plans to roll out a new payment system for India in the third quarter. In addition, it remains focused on local subscription pricing or localized content to drive growth in Turkey, Mexico, and South Africa.
Reasons to Remain Cautious
As an online education company, Chegg's future performance ultimately depends on its ability to continue to attract new students to its platform and retain existing users. Amid widespread adoption of mainstream AI technologies - primarily ChatGPT - by students, the company faces significant uncertainty about its ability to keep and build market share in the coming quarters.
Plus, CheggMate is still a beta product, and the full release of the offering could take time. That means even as Chegg is aggressively deploying resources toward its ChatGPT rival, it could be a while before the offering yields a meaningful contribution to its financial and operating performance.
Looking ahead, the company is scheduled to report earnings on Monday, Aug. 7. During the call, the company may provide more clarity on how its AI initiatives are playing out, and add visibility to its future revenue and growth projections. Given the near-term challenges, Chegg's revenues are expected to decline by 9-10% year-over-year in Q2. Meanwhile, adjusted EBITDA is also expected to decrease.
The Final Takeaway: Buy, Sell, or Hold?
Most of the analysts covering the stock remain neutral ahead of its Q2 earnings release. Out of the 15 analysts covering CHGG stock, 13 have a “Hold” recommendation, 1 analyst recommends a “Strong Buy,” and 1 maintains a “Moderate Buy” rating.
That said, the average price target for CHGG is $15.73, significantly higher than its Wednesday close at $10.16.
Chegg stock has corrected significantly, which might make it seem attractive from a price perspective. Further, the company is taking measures to reaccelerate growth, expand its addressable market, and create value for its shareholders in the long term.
However, considering the significant uncertainties outlined above, I believe investors should wait for management’s updated commentary around AI and its impact on second-quarter performance before buying the stock near current levels.
On the date of publication, Sneha Nahata 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.
