Chegg crashes 49% after the education company says the rise of ChatGPT among students is impacting customer growth

• Chegg stock crashed 49% on Tuesday after the education company said students are increasingly using ChatGPT for homework help.
• First-quarter earnings beat analyst estimates, but that wasn't enough to stem fears that ChatGPT is a serious threat to Chegg.
• "Since March, we saw a significant spike in student interest in ChatGPT," CEO Dan Rosensweig said.

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Chegg stock crashed as much as 49% on Tuesday after the company said that OpenAI's ChatGPT is increasingly being used by students for homework help.

The education company sells subscription memberships to an online portal that helps students study for tests and complete homework.

First-quarter earnings beat analyst estimates as Chegg saw little impact on its business from ChatGPT early in the quarter. But that suddenly changed towards the end of the period after the upgraded ChatGPT 4 tool was released on March 14.

"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 signups. 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," Chegg CEO Dan Rosensweig said on the company's earnings call.

But the company is fighting back, specifically through its introduction of CheggMate, which is a chatbot offering built upon Chegg's extensive library of subject matter knowledge to help students study and complete their homework. CheggMate is built with OpenAI's ChatGPT, and a beta of the new service will launch this month.

Rosensweig stressed that CheggMate is still in the early stages of its launch and the impact of both that and ChatGPT on its business may not be fully known until September, when the school season starts up again. 

JPMorgan said in a Tuesday note that it is encouraged by the company's investment in CheggMate, but not enough to upgrade the stock, which it rates at a "Neutral" with a $14 price target.

"Visibility remains limited and Chegg removed its initial 2023 guidance... While generative AI/LLMs may weigh on near-term subscriber acquisition, we're encouraged by the launch of CheggMate... and Fall enrollment trends will likely improve and should help subscriber trends later this year and into 2024," JPMorgan said.