Why Chegg (CHGG) Stock Is Down Today

Jabin Bastian /
2024/02/06 11:37 am EST

What Happened:

Shares of online study and academic help platform Chegg (NYSE:CHGG) fell 9.1% in the morning session after the company reported fourth quarter results with revenue and EBITDA guidance for the next quarter missing estimates. That's on top of its subscribers shrinking this quarter. 

During the earnings call, the CFO acknowledged some positive signs in the business but cautioned that it's premature to predict when revenue and margin growth will resume. This suggests the rise of generative AI still poses a serious threat to Chegg's business model despite the company's ongoing efforts to develop its own AI models to stay on top of the competition. For example, during the earnings call, the company highlighted the release of Automated Answers, which enables faster responses to questions at a lower cost, potentially offsetting some competition from new AI solutions like Chat GPT. 

On the other hand, Chegg narrowly topped analysts' revenue expectations this quarter. But that's where the good news ends. Overall, this was a mediocre quarter for Chegg.

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 20 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business. 

The previous big move we wrote about was 18 days ago, when the company dropped 6% on the news that 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."

Chegg is down 20.7% since the beginning of the year, and at $8.88 per share it is trading 57.8% below its 52-week high of $21.03 from February 2023. Investors who bought $1,000 worth of Chegg's shares 5 years ago would now be looking at an investment worth $249.65.

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