Chegg’s Stock Tumble Serves as Wake Up Call on the Perils of AI

Shares of Chegg, a company offering students various study aids, dropped nearly 50% on Monday after the firm announced that ChatGPT heavily impacted its future business outlook, rendering its previous annual guidance obsolete.

News outlets like CNBC were quick to report with headlines such as "Chegg shares drop more than 40% after company says ChatGPT is killing its business." However, the story is more intricate than just ChatGPT's emergence, and examining the nuances sheds light on the broader challenges that companies face in adapting to the AI era.

To better comprehend the stock decline, we need to delve into the earnings call led by CEO Dan Rosensweig. Rosensweig, who has spearheaded Chegg for twelve years, promptly pointed out that Chegg exceeded revenue and EBITDA guidance for Q1 2023. In the February earnings call, he had flagged ChatGPT's rising popularity as a potential tailwind, alerting investors that Chegg was closely monitoring the situation.

Internally, Chegg had initiated its own AI project, and the company announced CheggMate in April—an AI-powered study tool utilizing OpenAI's GPT-4 language model. "Trained by 150K+ subject matter experts who serve as quality control editors for accuracy," the tool pledges the "same expert responses from Chegg, now even faster and more conversational."

It's Hard to Win Versus ChatGPT

During the earnings call, Rosensweig pointed out a red flag: user sign-up numbers met the company's expectations for January and February, but in March—a month when college midterms typically drive peak sign-up numbers—something went wrong. "We saw a significant spike in student interest in ChatGPT," Rosensweig said, adding, "we now believe it's having an impact on our new customer growth."

Without disclosing the extent of the business impact, Rosensweig informed investors that they should no longer rely on the previous guidance provided by the company. "We believe that it's prudent to be more cautious with our forward outlook. Therefore, we intend to provide only the next quarter's guidance."

Withdrawing guidance for a subscription-based company indicates a significant disruptive effect. And CEO Rosensweig's additional answers on the matter did not calm investors:

• Despite developing their own AI product, Chegg has not yet launched CheggMate, and Rosensweig expressed uncertainty about its potential impact.

• When asked what insights user testing of CheggMate had yielded, Rosensweig admitted, "it's too soon."

• Rosensweig failed to provide a compelling response when questioned about how CheggMate would compete against educational rivals such as Quizlet, Brainly, and Khan Academy, all of which have announced their AI chatbots. Instead, he vaguely emphasized, "what we're doing is far superior."

• In response to how CheggMate would differ from ChatGPT, Rosensweig stated, "First, it will look a lot cooler." Analysts did not find this reassuring.

Arvind Ramnani, an analyst at Piper Sandler, remarked that the earnings call and Chegg executives' responses left "more questions than answers."

Ultimately, Wall Street analysts concluded that CheggMate's success remains uncertain, and its delayed launch enables students to become further entrenched in using ChatGPT rather than other products based on OpenAI's language models. Chegg’s singular focus on student study aids leaves it incredibly vulnerable as a result.

Broadly Valuable Lessons for Companies Grappling with AI

Chegg's decline offers several essential lessons for companies dealing with the rise of AI:

1. Adding AI to your business does not guarantee defensibility or success, as demonstrated by Chegg's GPT-4 product announcement failing to alleviate investor concerns.

2. ChatGPT continues to dominate mindshare, with our recent Google Trends analysis showing its relative interest versus other chatbots growing in recent months. Dislodging users from ChatGPT could be more challenging than anticipated, especially if companies delay releasing their AI products.

3. Competition in the AI product space will be intense, and non-differentiated products offering little value-add on top of baseline language models may see limited user adoption. Ars Technica, examining the rise of numerous AI-fueled products, found that "most are basically thin wrappers seeking to arbitrage LLM pricing, with virtually no differentiation or competitive moat."

Despite bleak assessments, CEO Rosensweig remains optimistic. "This is not a sky falling thing," he explained, "it's just an acknowledgement that there's been a technological shift." However, if investor sentiment is any indication, they believe Chegg's future is far from bright.