Chegg shares drop more than 40% after company says ChatGPT is killing its business

Chegg shares tumbled after the online education company said ChatGPT is hurting its growth.

“In the first part of the year, we saw no noticeable impact from ChatGPT on our new account growth and we were meeting expectations on new sign-ups,” CEO Dan Rosensweig said during the earnings call Monday evening. “However, since March we saw a significant spike in student interest in ChatGPT. We now believe it’s having an impact on our new customer growth rate.”

The company, which provides homework assistance and online tutoring, said revenue would be between $175 million and $178 million this quarter, far below FactSet’s analyst consensus estimate of $193.6 million.

Chegg shares closed down 48.41% to $9.08 on Tuesday.

Otherwise, Chegg beat first-quarter expectations on the top and bottom lines, with earnings per share ex-items of 27 cents above analysts’ 26 cent estimate, and revenue of $188 million topping a $185 million consensus.

Following the results, Morgan Stanley analyst Josh Baer slashed his price target to $12 from $18. The analyst said that AI “completely overshadowed” the results.

Meanwhile, Jefferies downgraded the stock to hold from buy, citing the threat artificial intelligence poses to Chegg. The Wall Street firm slashed its price target to $11 from $25. 

Chegg is developing its own AI product, CheggMate, which is meant to help students with their homework. The product is built in collaboration with OpenAI, which develops ChatGPT. However, Jefferies analyst Brent Thill says the impact of the product is uncertain. 

“While CHGG plans to launch the CheggMate beta this month to a select few, the timing of a full launch is unclear,” he said. “We don’t expect there to be any meaningful impact from CheggMate in FY23, believing any potential impact won’t show up until FY24 at the earliest.”

— CNBC’s Michael Bloom and Brian Evans contributed reporting.

Correction: Chegg shares fell more than 40% on Tuesday, and CEO Dan Rosensweig spoke during the company’s earnings call Monday evening. A previous version misstated the days of the week.