Chegg Chokes on AI Attempt, CEO Talks it Up As He Passes Torch

May 08, 2024 at 07:30 AM EDT

Photo of Chegg headquarters. Chegg AI Struggles, CEO Discusses Challenges During Transition. Despite the viral spread of artificial intelligence (AI) applications in companies and industries, not every enterprise is cashing in wildly or even seeing an uptick in business. This has become painfully evident for online education platform provider Chegg Inc. (NYSE: CHGG).

Ironically, students are one of the main users of AI, as ChatGPT saw its first-ever monthly usage decline when the school let out in June 2023. The computer and technology sector company shares hit new all-time lows at $4.96, a far cry from its peak at $115.21 during the post-pandemic bubble in February 2021.

If you’re wondering if it’s an industry problem, some of its peers like Coursera Inc. (NYSE: COUR) and Udemy Inc. (NASDAQ: UDMY) are trading near lows, while Stride Inc. (NYSE: LRN) is trading at all-time highs.

Jack of Many Trades

Chegg originally started as a textbook marketplace and has continued to add on services, currently offering a number of products in the education services segment. The platform is subscription-based at $14.95 per month and provides homework solutions, study guides, online tutoring and textbook rentals. It’s writing service and math solver costs $9.95 per month each. Before AI, students would go to the platform for answers and solutions. Queries were answered and written by human tutors and experts.

The advent of ChatGPT and generative AI apps has crushed Chegg since students can get their answers quicker, cheaper and without being tracked. Chegg decided to implement AI only after it was taking a dramatic hit to subscriptions.

The Promise of CheggMate AI

Chegg launched its AI solution called CheggMate, powered by Open.ai's GPT-4. It would utilize Chegg's database of billions of learning content and over 150,000 subject matter experts. CheggMate was to deliver upon the promise of personalized learning with the ability to anticipate the needs of each student by creating tailor-made quizzes and tests, giving students context and addressing students' queries in any format from text, photos, formulas or diagrams. CheggMate has various subscription plans ranging from $8.49 to $13.99 a month.

AI Isn’t Helping Subscriptions, Yet

As students can get AI-delivered answers cheaply through free memberships to AI platforms, it may cause them to rethink spending money on the various Chegg subscriptions, especially when the alternative options are anonymous and the answers potentially identical to freely available resources. Nonetheless, AI is not helping subscriptions as they continue to decline. Chegg CEO Dan Rosensweig insists it is a multi-year year journey to impact revenues and subscribers positively. However, he won’t be around for at least as CEO as Rosenburg leaves for the role of executive chairman on June 1, 2024.

Chart showing how Chegg fell to all-time lows as it lowered its Q2 2024 outlook as its AI integratin has yet to stop the falling subscription rates.

Daily Descending Triangle

CHGG formed a daily descending triangle breakdown pattern. The descending trendline formed at $8.15 on March 22, 2024, capping bounces at lower highs. The flat-bottom lower trendline formed at $6.63. The breakdown occurred after its Q1 2024 earnings release and lowered guidance. CHGG fell to an all-time low of $4.96. The daily relative strength index (RSI) fell to the 25-band oversold level. Pullback support levels are at $

Business is Declining

Chegg reported EPS of 26 cents, beating consensus estimates by a penny. Revenues fell 7.1% YoY to $174.5 million slightly beating $174.04 million consensus estimates. Subscription service revenues fell 9% to $154.1 million. Subscription service subscribers fell 8% YoY to 4.7 million. Gross margins were 73%, and net loss was $1.4 million. Adjusted EBITDA was $46.7 million.

Downside Guidance

Chegg provided downside guidance for Q2 2024 revenues of $159 million to $161 million versus $173.56 million consensus estimates. Subscription service revenues are expected to be between $144 million to $146 million. Gross margins are expected between 70% to 71%. Adjusted EBITDA is expected between $38 million to $40 million.

New CEO Sees the Glass Half Full and About to Get Fuller

Nathan Schultz, who has been with Chegg for 16 years, will take the reigns as CEO effective June 1, 2024. Schultz talked about rolling out the new interface for Q&A and developed a proprietary AI platform that includes 26 large language models verticalized for education. Echoing Rosensweig, Schultz said that AI integration is a multi-year roadmap and essential to returning to subscriber growth. He did note that they are seeing encouraging trends in two indicators: retention rate and engagement. He pointed out that Q1 2024 had over 9 million questions compared to 3.9 million in the year-ago period. More questions result in more content generation and more traffic that will lead to new customers in the coming quarters.

Schultz commented, “Over the next few quarters, we are focused on rolling out enhancements and features that will deliver an even richer personalized learning experience. Whether that means real-time conversational support with our AI tutor, generating flashcards, generating practice problems, or creating a focused study guide. Our platform is designed to anticipate, generate, and deliver personalized solutions, which we expect will increase our value to students and expand the audiences we can serve in a cost-efficient way.”

Chegg analyst ratings and price targets can be found on MarketBeat.

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