In the realm of artificial intelligence (AI), companies like Nvidia (NASDAQ:NVDA) have soared while others, like Chegg (NYSE:CHGG), have seen their fortunes dwindle due to the rise of generative AI and ChatGPT. With Chegg down 36.7% year-to-date and hovering near historic lows, investors are questioning whether the stock presents an overlooked opportunity.
ChatGPT’s Impact on Chegg
Chegg, akin to other “stay-at-home” beneficiaries such as Zoom Video Communications (NASDAQ:ZM) and Teladoc Health (NYSE:TDOC), witnessed robust growth during the pandemic but struggled thereafter. One of Chegg’s challenges has been the emergence of ChatGPT, which the company candidly acknowledged during earnings calls. However, Chegg is adapting by leveraging AI, transforming it from a hindrance to an asset.
Revenue and Subscriber Declines
Chegg’s revenues peaked in 2021 at $776 million before experiencing consecutive declines of 1.2% in 2022 and 6.6% in 2023. Q1 2024 revenue guidance indicates a further 15% year-over-year decrease, with analysts projecting a 4.3% revenue decline for 2024. Additionally, Chegg’s subscriber count dropped by 6% to 7.7 million in 2023.
Strengths and Weaknesses
Despite revenue challenges, Chegg maintains robust cash flows and a healthy balance sheet. In 2023, it generated $173 million in free cash flows on adjusted EBITDA of $222 million, with minimal net debt. However, the company’s significant share-based compensation of $133 million warrants scrutiny.
Revival Strategies
Chegg’s management outlined four priorities for 2024, including new account growth, maintaining strong margins and cash flows, enhancing AI capabilities, and leveraging its Skills platform. The company is employing promotional pricing to convert leads into long-term customers and is transitioning towards automated answers to reduce customer service costs.
Facing ChatGPT
While initially wary of ChatGPT’s competition, Chegg’s CEO, Daniel Rosensweig, expressed optimism during the Q4 earnings call, highlighting ChatGPT’s limitations in accuracy and learning capability compared to Chegg. Rosensweig believes that as Chegg enhances its AI capabilities, AI will become an advantage rather than a threat.
Stock Outlook
Wall Street analysts exhibit mixed sentiments towards CHGG stock, with only one rating it as a “Strong Buy.” The mean target price of $9.94 suggests a 38% upside potential from the previous closing price, indicating cautious optimism among analysts.
Investment Considerations
Despite facing multiple challenges, including declining revenues and competition from ChatGPT, Chegg’s valuation appears attractive. With a next 12-month enterprise value-to-EBITDA ratio of 5.4x, the stock presents a compelling investment opportunity. However, Chegg must demonstrate a return to growth to justify investor confidence.
In summary, while Chegg confronts formidable obstacles, its reasonable valuation suggests that the stock warrants consideration amid its ongoing struggle against ChatGPT. Investors should closely monitor Chegg’s progress and evaluate its ability to navigate the evolving landscape of AI-driven education platforms.
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