Chegg crashes 40% as ChatGPT clouds FY visibility; Jefferies cuts to Hold

Chegg (NYSE:) shares trade nearly 43% lower following disappointing second-quarter guidance and lackluster first-quarter results. The company is seeing weak visibility but said it will aggressively pursue artificial intelligence (AI) opportunities.

In the first quarter, fell 7% to $187.6 million, versus the consensus of $185.2 million. Non-GAAP EPS was reported at $0.27, versus the consensus of $0.26.

Looking ahead, Chegg said it sees Q2 revenue of $175-$178 million, which was well below the consensus of $194M. Adjusted EBITDA is seen in the range of $53M to $55M for the second quarter. Further, given weak visibility, the company is not providing guidance beyond the second quarter.

“While we continue to have confidence in our ability to forecast the current quarter, given recent industry developments our visibility beyond that is less certain,” CFO Andy Brown said. “As such, we will be guiding to the current quarter only, while these conditions exist.”

Brown also said the company is evaluating areas to reduce existing expenses and CAPEX to maintain industry-leading margins and cash flow, even as they lean into important investments in AI.

On AI, Chegg said since March they saw a significant spike in student interest in ChatGPT. They now believe it’s having an impact on new customer growth rates.

Jefferies analysts Chegg shares to Hold from Buy with the price target going to $11 per share (down from $25), citing increasing AI headwinds.

“We are lowering our FY24 Rev/ Adj EBITDA estimates each by 16%, and are now 14%/ 19% below consensus respectively. We believe any impact from CheggMate (CHGG’s AI product) is likely multiple quarters away. Shares appear cheap at 8x our lowered FY24 EBITDA estimate, but with no growth and existential fears from AI, we believe shares are fairly valued,” they said in a note.

Goldman Sachs analysts cut the price target to $14 per share.

“We now see Chegg squarely in the show me camp as the headwinds from ChatGPT need to be better understood and the company’s own forward AI initiatives need data driven proof points to bolster investor confidence,” they wrote.

Additional reporting by Senad Karaahmetovic