Wednesday, 1 November 2023

Why Chegg Stock Was Sliding Today

by Rose White

Shares of Chegg (NYSE: CHGG) were falling Tuesday after the company reported third-quarter earnings Monday night, and as fears of competition from artificial intelligence (AI) chatbot ChatGPT continue to weigh on the stock.

As of 12:51 p.m. ET, Chegg was down by 14.5%.

Why Chegg Stock Was Sliding Today

Image source: Getty Images.

Chegg’s problems continue

The education technology company known for textbook rentals and homework help actually beat headline estimates for the quarter, but its results were still weak. Revenue fell 4% to $157.9 million, which topped the consensus estimate of $152.7 million.

Adjusted gross margin, which excluded a $38 million asset impairment, fell from 76% to 74%, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) slipped from $50 million in the year-ago quarter to $38.8 million. Adjusted earnings per share, meanwhile, declined from $0.21 to $0.18, but that result was slightly ahead of expectations of $0.17. The number of subscribers to its services also fell by 8% to 4.4 million, another sign of weakness.

In the earnings release and on the conference call, CEO Dan Rosenzweig addressed the AI transition once again, saying: “We have all learned a lot and are experiencing how AI is impacting our lives. We know that students are using ChatGPT but what is interesting is that they are using it for a variety of things in addition to education. Because Chegg is verticalized for learning, what isn’t surprising is that when students try us and compare us to more general AI solutions, Chegg outperforms.”

Is the growth story over?

The company’s fourth-quarter guidance called for the revenue decline to accelerate. It sees sales falling 9% at the midpoint of its $185 million to $187 million guidance range. It also forecast adjusted EBITDA of $62 million to $64 million for the quarter, which would be down from $74 million in Q4 2022.

While Rosenzweig’s commentary might sound encouraging, it’s hard to bet on this stock while revenue is falling, and investors seem to be reacting to that sales trend Tuesday morning. Until Chegg can show the market that it can grow in spite of the threat from ChatGPT and similar generative AI systems, investors will be better off avoiding the stock.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool recommends Chegg. The Motley Fool has a disclosure policy.

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