Why Chegg (CHGG) Shares Are Getting Obliterated Today

Max Juang /
2024/01/19 12:47 pm EST

What Happened:

Shares of online study and academic help platform Chegg (NYSE:CHGG) fell 6% in the morning session after Goldman Sachs analyst Eric Sheridan downgraded stocks in the education technology segment, citing "artificial intelligence headwinds." The analyst lowered Chegg's rating from Neutral to Sell and cut the price target from $10 to $8. The new price target implied a potential 16% downside from where shares traded when the downgrade was announced. 

Eric Sheridan added, "There are still open-ended questions around how the edTech landscape will evolve with key questions being how the rise of generative AI may alter learner behavior and ultimately user growth for many edTech companies as well as what the balance of investments (licensing fee, compute costs) and cost savings (on the content side) will be."

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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%. In context of that, today's move is indicating the market considers this news meaningful, although it might not be something that would fundamentally change its perception of the business. 

The biggest move we wrote about over the last year was 9 months ago, when the company 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 15.5% since the beginning of the year, and at $9.49 per share it is trading 55.6% below its 52-week high of $21.34 from February 2023. Investors who bought $1,000 worth of Chegg's shares 5 years ago would now be looking at an investment worth $284.73.

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