Chegg stock crashes as free AI tools send online education company 'spiraling'
Chegg stock (CHGG) plummeted on Tuesday as the rise of free artificial intelligence tools has stunted growth at the online education company.
Late Monday, the company said in its first quarter release it expects total net revenue, gross margins, and profits to all decline sequentially in the current quarter.
The stock fell more than 20% Tuesday morning following the earnings release, which included an announcement that Nathan Schultz will replace Dan Rosensweig as CEO.
Rosensweig will now serve as executive chairman.
Chegg stock has lost nearly 70% over the last year and has been roughly cut in half in 2024. From its peak in 2021, the stock is down over 95%.
Since the launch of ChatGPT in late 2022 the company has seen year-over-year subscriber declines.
Following this report, Jefferies analyst Brent Thill downgraded the stock to Underperform from Hold, slashing his price target to $4 from $7. He noted that Chegg is "spiraling with no stability in sight."
"We question if Chegg can build an AI experience that is meaningfully better than free alternatives that students will be willing to pay for," Thill wrote.
"Chegg has historically always beaten free competitors in the marketplace, but we believe the AI wave presents a truly credible free product experience to Chegg's paid subscription."
Chegg stock was a pandemic darling stock of sorts as education moved online and the company thrived, sending the stock to an all-time high of $113 per share in early 2021.
As students returned to the classroom and free AI solutions emerged, the company's revenue tumbled, and the stock is now trading hands around $6 per share.
In May 2023, Chegg told investors it had seen a "significant spike in student interest in ChatGPT" since March of that year.
"We now believe it's having an impact on our new customer growth rate," the company said at the time. A trend that has continued.
Chegg's 2024 first quarter revenue of $174.4 million was down 7% compared to the same period a year prior and down nearly 14% from the first quarter of 2022.
Thill highlighted in his research that Chegg has seen declining subscriber growth for five straight quarters, which lines up with the launch of ChatGPT. He projected those losses will continue throughout 2024.
For its part, Chegg believes AI can be a benefit to its business moving forward as it integrates the technology into its product over the next several years.
"We've embraced AI and have completely rebuilt our user experience and services, rolling out a multiyear product-led growth plan to emerge from the post-COVID period and return to revenue and profit growth," Rosensweig said on the company's earnings call on Monday.
"The transition will take time, but we are already seeing encouraging signs of how our new AI-enabled platform will serve more students in more ways than ever before."
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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