Shares of online study and academic help platform Chegg (NYSE:CHGG) fell 5.8% in the morning session after Morgan Stanley analyst Josh Baer downgraded the stock's rating from Equal-Weight (Hold) to Underweight (Sell) and lowered the price target from $10 to $9. The downgrade was driven by concerns about slowing year-over-year growth in web traffic. The analyst added that consensus estimates for Chegg are overly optimistic, especially in light of increased competition and the impact of AI.
The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Chegg? Access our full analysis report here, it's free.
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 19 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 previous big move we wrote about was 21 days ago, when the stock dropped 7% on the news that the company reported third quarter results, which revealed challenges, including a decreasing user base and sluggish revenue growth. During the earnings call, the company discussed its ongoing investments in new AI capabilities to remain competitive in the face of emerging generative AI solutions like Chat GPT. However, the market is still quite worried that AI is a net negative to Chegg rather than a long-term tailwind. On the other hand, revenue and adjusted EBITDA exceeded expectations this quarter. Guidance for next quarter for revenue and adjusted EBITDA were also in line to slightly above. Overall, it was a mixed quarter, with the soft guidance likely unconvincing given growing competition in the AI space.
Chegg is down 61.4% since the beginning of the year, and at $9.80 per share it is trading 67.2% below its 52-week high of $29.84 from November 2022. Investors who bought $1,000 worth of Chegg's shares 5 years ago would now be looking at an investment worth $393.37.
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