Chegg
stock is tumbling after earnings because not everyone can be an artificial intelligence winner.
Working out the big winners from the AI revolution has become a focus for investors recently—just look at
Microsoft’s
earnings.
But education technology firm
Chegg
(ticker: CHGG) provided a stark reminder that there will be some losers as well, as the artificial intelligence hype reaches fever pitch. The technology has the potential to upend sectors across the economy, and not everyone will benefit.
At first glance, there was nothing wrong with Chegg earnings. The company reported a profit of 27 cents a share, beating forecasts for 26 cents, on sales of $187.6 million, ahead of estimates for $185.18 million.
Unfortunately, the company didn’t stop there. Chegg warned that increasingly more students are turning to OpenAI’s ChatGPT for help with their homework, hurting its own new customer growth rate in March. The company also declined to provide any full-year guidance, citing uncertainty about how the trend will play out.
It may still end up being an AI winner. It’s launching its own generative AI platform, called CheggMate, in partnership with OpenAI. Chegg thinks the platform’s blend of artificial intelligence and human expertise will ultimately prove popular and increase the size of its market.
But for now investors are concerned it will be left behind, as the stock tumbled 47% ahead of the open Tuesday.
Those fears spilled over to rival
Pearson
(PSON.U.K.), shares of which fell 8% in London trading. Meanwhile, shares in language-learning platform
Duolingo
declined more than 9% in early U.S. trading.
For Chegg, KeyBank Capital Markets analysts said the “AI threat is real,” in a note Monday, adding that the company’s CheggMate launch was a direct response to the competition.
“There remain many questions, including monetization and potential adoption. Until then, we believe the competitive threat of ChatGPT remains a headwind,” they added, maintaining a Sector Weight rating on the stock.
J.P. Morgan analysts were more positive about Chegg’s own AI efforts but said it was “integral” to the company’s success. “It remains early in the shift to generative AI/large language models, but we’re encouraged by Chegg’s strategy and speed to combat near-term headwinds from ChatGPT on subscriber acquisition, and investments toward CheggMate and broader AI should meaningfully improve the customer experience over time,” they said. They have a Neutral rating on the stock.
Tech investors have been scrambling to figure out the long-term beneficiaries ever since OpenAI’s ChatGPT boomed in popularity at the end of last year.
Microsoft
(MSFT) stock surged more than 7% after earnings last week as the tech giant detailed the early impact of AI on its business.
The company’s Azure OpenAI cloud service already has 2,500 customers, including
Shell
(SHEL.U.K.) and
Mercedes-Benz
(MBG.Germany), up tenfold in the last quarter, CEO Satya Nadella said.
It will also account for roughly one percentage point of the Azure unit’s forecasted 26% to 27% revenue growth guidance in the current quarter.
Nvidia’s
(NVDA) earnings later this month will be an opportunity to assess the progress of another potential AI winner.
But investors should also be wary of those being left behind.
Write to Callum Keown at [email protected]
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