Chegg looks interesting

WakeMeUp · May 3, 2023, 10:08pm

I’d really appreciate other people’s views.

So until yesterday I had never heard of Chegg and knew nothing about them. I did however notice the share price drop 50% simply because I had PSON on a watchlist and had set an alert that triggered which led me to see reference to PSON’s drop being a result of Chegg.

The drop yesterday seemed totally overdone (even though I knew nothing of the fundamentals) so I bought a ridiculous small position at what turned out to be the share price low (good timing and luck).

So today I’ve done a bit of research and still trying to check some facts but coming to the conclusion that the drop in share price was ridiculous and it is now a bargain. So…

So firstly, Chegg offers tools and services to student to help learning. They have access to 150,000 “experts” and a huge library of reference information/data and provide revision and learning tools. The Q1 results were pretty positive but they mentioned some softness in new subscriptions in March 2023 due to chatGPT. The market panicked thinking chatGPT is going to replace the world and will be the end - most people don’t realise how poor some of the GPT3 responses can be.

So my highlights from my research so far:

In April (I think 17th April) Chegg announced that it had already concluded a deal with openAI to integrate chatGPT into Chegg’s tools providing an AI powered learning tool for students called Cheggmate (which will be proprietary to Chegg) and which will be based on Cheggs validated data set. Thus it will be a powerful AI tool with reliable accurate answered backed up by 150,000 experts to assist the AI learning and provide student support alongside the AI tool.
Whereas the market panicked that chatGPT may make Chegg redundant, the reverse seems to the case imo. Having openAI learn from accurate data set in a vertical market tool (CheggMate) actually could provide an incredibly powerful tool. Also GPT4 plus subscription is $20/month so even from a financial perspective it would seem better for a student to sign up to Cheggmate than GPT4 (putting aside that the quality of the tool and information should be better with Cheggmate).
online it says that there are 126.55million shares in issue in Chegg. At $10/share that means Chegg market cap is 1.26 billion. The Q1 results say

“Looking at the balance sheet, we ended the quarter with $1.2 billion of cash and investments. During the quarter, we entered into an accelerated share repurchase agreement of $150 million which we expect will reduce outstanding shares by approximately 7% percent and will be completed during Q2.”

so the market cap now (after the drop yesterday) appears to be equivalent to the cash within the business!!! In addition the share buyback will now operate with a reduced share price so outstanding shares will be decreased even further.

The new Cheggmate tool is explained here CheggMate: Homework Help powered by AI
The announcement of Cheggmate says “Sign-ups to test this early version of CheggMate are open and limited early access of CheggMate will become available to students in May 2023” Chegg announces CheggMate, the new AI companion, built with GPT-4 | Business Wire
Yesterday my initial reaction was that the market must know best… and was prepared to watch another company get beaten down. However, OpenAI is never going to compete directly with Chegg. OpenAI is about developing the GPT not about targeting vertical markets or specific applications that is why they will license the AI to companies like Chegg. Thus AI is an opportunity for Chegg not its doom. Chegg are already well positioned - they provide the textbooks (including renting books), have the expert tutors, have the learning material and quality datasets…
Chegg have also done deals with Doordash (to get free food deliveries while you are studying late at night) and Calm (to help relax students after stressful times)… Thus they are clearly trying to develop a comprehensive student services package which chatGPT is never going to do.

Here’s the interview that Chegg did after the price dropped yesterday: Chegg CEO on stock drop after earnings and A.I.'s impact on outlook (cnbc.com)

I’m not trying to hype Chegg but I find it deeply upsetting when good businesses get harmed and I got the impression looking at some of the trading today that some shorters were trying to play games. Hopefully anybody shorting will be at significant risk especially if a beta version of Cheggmate is going live this month and there is a $150 million share buyback in operation.

From knowing nothing about the company I am now very interested to see how all of this evolves both from a share perspective but also from a company integrating GPT4 into a service offering

WakeMeUp · May 5, 2023, 6:46pm

I think it will be interesting to see how Chegg plays out not only in the short term, but also in the medium and longer term. Potentially Chegg could encapsulate many of the issues surrounding AI.

So a couple of days ago Chegg announced ok results but the share price dropped 50% essentially on the fear that ChatGPT could make Chegg redundant. That, I believe, fundamentally misunderstands ChatGPT. Chegg’s share price then recovered from a low below $9 to $11 to then drop back to below $10 and has today been on a steady rise - currently £10.20.

The panic is that Chegg (and many other companies) may be destroyed by chatGPT. That fails to understand that OpenAI isn’t going to pursue vertical application for GPT it will license the technology and exploit their API for use by companies such as Chegg.

Chegg may not exploit the opportunities that AI provides but the opportunities are there and it seems to me (but wdik) that the market is failing to recognise this. Today Barons put out a release about the jobs that are risk from AI. That is true many jobs are at risk. There is the potential for massive change (social, economic, political…) but if jobs are lost they are being replaced by technology that someone is providing. There is a forecast (I don’t remember by who) that AI could double or triple global GDP. Thus some companies will gain massively. Every job that is lost is effectively a high margin gain for some set of companies. There are huge political issues and politicians probably have little idea how to handle the storm that’s coming as fairly well paid middle class professionals lose their jobs to AI. The protests by the Hollywood screen writers is just the opening scene.

While I am an investor (generally), on this issue my overriding viewpoint is as someone who has spent his career in tech and who is deeply uneasy at the huge changes about to be unleashed on society.

The note from Barons today highlights that teachers could be one of the most affected professions by AI. There have been lots of articles about students trying to use GPT for homework and the risk of cheating. While these are valid concerns and issues, they also largely miss the point and are just an easy current focus for journalists. Fundamentally, there is the potential for tools that can teach and educate (ie replace teachers). Not only could they teach but they could do so on a one to one basis with personalised learning tailored for the individual.

On 17 April Chegg announced that it was already in development of a GPT4 based tool that uses Chegg’s own educational data as the basis for the AI’s learning. I provided links in my original post and Chegg are clearly positioning CheggMate (their GPT based AI tool) are superior to GPT3/4 in several ways not least accuracy.

My impression is that the market has simply looked at GPT4 as a risk even though OpenAI charge for use of GPT4 and will probably not develop vertical applications of it. OpenAi may also be mindful of the risk that if they did try to develop applications based on their LLM/GPT4 they may be a political target to be split up or somehow more significantly regulated. Thus their obvious strategy to license the tech.

So turning to Chegg; Cheggmate is being positioned at the moment as an AI based replacement/alternative to Chegg’s current tools for students. However, it is pretty obvious that Chegg are one of the best placed companies to develop an AI teaching assistance or AI teaching tool - ie for use in the classroom either alongside the teacher (assistant) or to replace the teacher (as highlighted in the Baron note). Chegg’s market changes from college students to every High School student and every classroom. Also, it is an obvious tool for home educators. It also has huge potential for helping with the education and teaching of students with learning difficulties or who are marginalised by the current education system. Someone will provide AI tools for all of these things (and more). If Chegg don’t do it, someone will. However, CheggMate is meant to go live (in a Beta form) this month. Thus, at the moment I think the market has seriously misjudged the situation with Chegg.

The drop in Chegg’s share price seems to reflect a view that Chegg’s market could be destroyed. That fundamentally misunderstands the situation. The market is greatly increased. The negative consequences by AI will be felt by teachers, academic staff, teaching assistants, school and college administrators, etc. Whereas for the solution provides (ie companies like Chegg) the market has just greatly increased,

The fact that Chegg announced a month ago that they were close to release of an AI tool shows that they are proactive and have identified the opportunity here (or at least started to identify it).