OpenAI’s ChatGPT could destroy a publicly traded company. Chegg’s CEO thinks ChatGPT could hurt his company’s future growth.
“However, since March we have seen a significant spike in student interest in ChatGPT,” Chegg (CHGG) CEO Dan Rosensweig says in a 1 May 2023 earnings call. “We now believe it’s having an impact on our new customer growth rate.”
Interestingly, Rosensweig admits he didn’t see ChatGPT as a threat to his business. “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,” Rosensweig admits.
Can Chegg Make money with GPT-4?
Notably, Chegg is testing CheggMate, a GPT-4 chatbot, a press release reveals.
“CheggMate will leverage Chegg’s leading personalized learning platform, proprietary data set, and the advanced problem-solving capabilities of GPT-4, to create an AI conversational learning companion that will empower students to learn in real-time more effectively, and with greater accuracy than ever before,” Chegg claims.
“We believe the combination of Chegg’s proven ability to improve student outcomes, with the breakthrough technology of OpenAI and ChatGPT, will create the most powerful study companion for students around the world,” Rosensweig claims.
Chegg claims CheggMate can enable personalized learning through conversational AI guided support. CheggMate can create instant quizes and make content recommendations tailored to a student’s needs, Chegg claims. They also claim CheggMate can remember where students were when they quit a lesson. Hence, CheggMate could be the world’s first GPT-4 teacher or AI teacher. They call CheggMate an adaptive tutor that can provide instant feedback.
Chegg claims over 150,000 subject-matter experts trained CheggMate. Additionally, CheggMate leverages Chegg’s proprietary library of billions of pieces of content.
How Smart is GPT-4?
GPT-4 is a large multimodal model AI “that exhibits human-level performance on various professional and academic benchmarks.” OpenAI, the creator of ChatGPT, built GPT-4. The acronym GPT stands for Generative Pre-Trained Transformer. GPT-4 is the fourth generation of GPT.
“For example, it passes a simulated bar exam with a score around the top 10% of test takers; in contrast, GPT-3.5’s score was around the bottom 10%,” OpenAI claims of GPT-4. Hence, we can view CheggMate and Chegg (CHGG) as tests of AI’s power and moneymaking potential.
What is Chegg (CHGG)?
Mr. Market thinks Chegg Inc. (NSYE: CHGG) is vulnerable to GPT-4 and ChatGPT because “study help tailored to courses” is one of its principal businesses.
For example, Chegg offers “expert learning support” starting at $15.95 a month. It also offers 24-hour-a-day and seven-day-a-week study help for upcoming tests and writing assignments. That study help includes expert Q&As and practice exams.
ChatGPT could threaten Chegg by writing students’ papers and assignments for free. It could also answer students’ questions for free. ChatGPT is a threat because it is a ChatBot. To elaborate, a chatbot is an AI or digital robot that can engage in conversations with humans.
Does ChatGPT threaten Chegg Inc?
Mr. Market thinks ChatGPT could destroy Chegg’s business. For example, Chegg’s share price fell from $25.41 on 3 January 2023 to $8.94 on 2 May 2023, but rose to $10.17 on 3 May 2023.
Dramatically, Chegg’s share price fell from $17.60 on 1 May 2023 to $8.98 on 2 May 2023. The media began publicizing Rosensweig’s comments about ChatGPT’s threat to Chegg’s business on 1 May 2023.
Hence, we need to ask if ChatGPT is hurting Chegg (CHGG) or if Rosensweig is blaming an AI for his company’s problems. Notably, Chegg’s business is far more than study aids.
For example, Chegg sells and rents college textbooks. They claim students can save up to 90% on over 750,000 textbooks at Chegg. To elaborate, Chegg cashes on America’s corrupt college textbook market.
In fact, the average US college student spent $340 on course materials (textbooks) in the 2021-2022 school year, Best Colleges estimates. The typical student spends $38 on course materials. First-year college students have it worse. The average first-year college student spent $1,226 on all schools.
How ChatGPT could threaten Chegg
Thus, I think online information that can take textbooks’ place is a bigger threat to Chegg than ChatGPT. However, ChatGPT can leverage that information by functioning as a more sophisticated search engine.
Notably, ChatGPT can browse the internet, TechCrunch reports. To explain, OpenAI offers ChatGPT plugins that can access up-to-date information, run computations, and use third party services. Hence, ChatGPT can search the internet for specific information.
Interestingly, OpenAI released those ChatGPT plugins on 23 March 2023, a month before Rosensweig’s comments hurt Chegg’s stock. Tellingly, those comments hurt another learning company, the British Pearson PLC (NYSE: PSO). Pearson’s stock fell by 15% on 2 May 2023, The Financial Times observes. Pearson’s share price fell from $10.96 on 1 May 2023 to $9.26 on 2 May 2023. However, Pearson shares rose back to $10.39 on 3 May 2023.
Will ChatGPT destroy Chegg (CHGG)?
Chegg (CHGG) was having problems before ChatGPT. For example, Chegg reported three quarters of revenue shrinkage.
Chegg’s revenues shrank by -1.10% in the quarter ending on 31 December 2022, -4.91% in the quarter ending on 30 September 2022, and -1.89% in the quarter ending on 30 June 2022. Conversely, Chegg’s revenues grew by 29.72% in the quarter ending on 30 September 2021.
However, Chegg’s quarterly revenues grew from $198.48 on 30 June 2021 to $205.19 on 31 December 2022. Interestingly, the quarterly revenues fell to $164.74 on 30 September.
How Much Money is Chegg (CHGG) making?
Chegg is making less money. For example, Chegg’s quarterly operating income fell from $26.20 million on 31 December 2021 to $7.67 million on 31 December 2021.
I think the quarterly operating income shows Chegg was making less money before they released ChatGPT on 30 November 2022. Notably, Chegg reported a -$11.44 quarterly operating loss on 30 September 2022. In contrast, Chegg’s quarterly gross profit rose from $104.84 million on 30 September 2021 to $153.77 million on 31 December 2022.
Chegg generates almost not cash. It reported a quarterly operating cash flow of $74.02 million on 31 December 2022. The quarterly operating cash flow rose from $37.96 million on 30 September 2022 and $80.03 million on 30 June 2022.
In contrast, Chegg reported a quarterly ending cash flow of $404.35 million on 31 December 2022. That quarterly operating cash flow rose from -$332.82 million on 30 September 2022.
Chegg’s Value Was falling before ChatGPT
Chegg’s value is falling. For example, its total assets fell from $2.919 billion on 31 December 2021 to $2.465 billion on 31 December 2022.
Similarly, the cash and short-term investments fell from $1.546 billion on 31 December 2021 to $1.058 billion on 31 December 2022. Furthermore, Chegg’s Total Debt fell from $1.685 billion on 31 December 2021 to $1.196 billion on 31 December 2022.
I think Chegg is a weak company with a questionable business model whose CEO is blaming failure on a new technology. Notably, I believe Rosensweig’s made his comments to promote CheggMate. I recommend investors avoid Chegg (CHGG) because I think this will stock will keep falling and the company could collapse.