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