What Happened:
Shares of online study and academic help platform Chegg (NYSE:CHGG) fell 22.7% in the morning session after the company reported first-quarter results and provided revenue and EPS guidance for the next quarter, which missed analysts' estimates. The weak guidance was triggered by a worse-than-expected outlook for its subscription revenue, which has higher margins than its other revenue streams. During the quarter, its revenue and subscribers were in line with expectations while its EPS and EBITDA slightly beat.
Overall, this was a mediocre quarter for Chegg, and the violent stock move reflects the heightened fear that this company may not exist in a year or two as AI renders its services--study guides and answer keys for students--obsolete.
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What is the market telling us:
Chegg's shares are not very volatile than the market average and over the last year have had only 20 moves greater than 5%. Moves this big are very rare for Chegg and that is indicating to us that this news had a significant impact on the market's perception of the business.
The biggest move we wrote about over the last year was 12 months ago, when the stock dropped 22.9% on the news that the company reported first quarter revenue that narrowly beat analyst's revenue estimates. EPS also beat. However the number of subscribers fell by 5.5% year on year, and revenue guidance for the next quarter came in below Consensus. Perhaps more importantly, full year guidance, given last quarter, was pulled. Management noted that beginning in March, it saw a significant spike in student interest in ChatGPT, with the AI technology impacting new customer growth. As we advance, Chegg may face an upsurge in competition from conversational AI platforms like ChatGPT, particularly for certain products in its lineup, including Chegg Study, which permits students to digitally ask questions and receive expert explanations, and Chegg Writing, which provides services such as expert writing feedback.
Chegg is down 53% since the beginning of the year, and at $5.27 per share it is trading 70.1% below its 52-week high of $17.60 from April 2023. Investors who bought $1,000 worth of Chegg's shares 5 years ago would now be looking at an investment worth $148.11.
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