CEO’s Warning of ChatGPT Threat Sparks 38% Rout in Edtech Stock

(Bloomberg) — Chegg Inc. plummeted as much as 38% after warning that the ChatGPT tool is threatening growth of its homework-help services, one of the most notable market reactions yet to signs that generative AI is upending industries.

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The company, which offers online guidance for students taking tests and writing essays, also gave revenue and profit forecasts for the current quarter that fell well short of analysts’ estimates. Chegg makes much of its money from subscriptions, which start at $15.95 a month, a revenue source that’s in peril if students see AI chatbots as an alternative to paying.

The impact of ChatGPT, an OpenAI tool that surged in popularity last year, began to be felt this spring, Chief Executive Officer Dan Rosensweig said in prepared remarks accompanying Chegg’s first-quarter earnings Monday.

“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,” he said. “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.”

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The remarks, coupled with the gloomy forecast, sent the shares as low as $10.91 in extended trading. Already, they were down 30% this year, closing at $17.60. Morgan Stanley analysts slashed their forecasts in a report Tuesday entitled “Risks becoming real.”

The solid results were “completely overshadowed by threat and impacts from generative AI,” the brokerage wrote. The quarter “provided evidence and support for bears expecting ChatGPT and other AI models to negatively impact Chegg. We significantly cut our forecasts, assuming Chegg subscribers move materially lower.”

Industries from banking to media and education have pondered the ramifications from generative AI development since OpenAI introduced ChatGPT publicly in November. While investors from the US to China have chased stocks that proclaim they’re working on similar models, it’s rare for CEOs to attribute their company’s underperformance to AI — followed by such a significant selloff.

Rosensweig said that retention rates of existing subscribers remain high, and he vowed to embrace AI “aggressively and immediately.”

“Throughout my career, I have witnessed the most significant technology platform shifts — from the creation of the internet to the explosion of mobile, and the movement of software to the cloud — and we believe that AI is the next big shift.”

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(Updates with analyst’s comments from the fifth paragraph)