Online education company Chegg has been sent to the principal’s office over the growing use of OpenAI’s ChatGPT chatbot by students. The company’s shares plummeted over 49% on Tuesday after Chegg acknowledged that ChatGPT is starting to hurt its business as more students use free A.I. chatbots for homework instead of paying for its study tools.
In its earnings report on Monday, Chegg said that the impact of ChatGPT started surfacing two months ago.
“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 sign-ups,” Chegg CEO Dan Rosensweig said during the company’s earnings call Monday. “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 rate.”
The company reported a 7% year-over-year drop in its first quarter revenue and withdrew its full-year earnings guidance. For the current quarter, Chegg predicted revenue of $175 million to $178 million, falling well short of FactSet’s analyst estimates of $193.6 million.
On the bright side, Rosensweig noted that Chegg had a high customer retention rate among students, which could draw more students to its platform in subsequent quarters. The company offers services like online tutoring, proofreading, and study tools.
But investors are still pessimistic about Chegg in the chatbot era. Its shares tumbled to between $8.70 and $8.95 in midday trading on Tuesday.
Also on Tuesday, Jefferies downgraded Chegg because of how “A.I. headwinds” could affect the edtech company’s “fundamental story.” Despite being popular among students, Chegg may not be able to keep up with the viral nature of ChatGPT-like tools, according to Jefferies analysts.
“While retention rates of CHGG’s existing customers remain strong now, we fear that student usage of A.I. tools like ChatGPT could cause a viral sensation around campus (just like CHGG had benefited from), which could increase churn in the coming quarters,” Jefferies analysts wrote in a Tuesday note, using Chegg’s stock ticker.
The investment bank also worries that with the growing popularity of some A.I. services, Chegg’s “core offering could become extinct as consumers experiment with free A.I. tools.” In other words, students could opt for ChatGPT or similar A.I. tools to supplement their study rather than using Chegg’s paid services that cost roughly $20 a month.
In an effort to compete, Chegg has embraced A.I. by collaborating with the same company causing the slowdown in its customer growth—OpenAI. Through a service called CheggMate, announced last month and powered by OpenAI’s technology, Chegg hopes to provide tailor-made study suggestions to its students. The company plans to provide limited access to the tool later this month.
But even after the A.I. tool debuts, it’s uncertain whether it will be Chegg’s savior, Morgan Stanley analyst Josh Baer said.
“The optimistic scenario of the new A.I.-powered ‘CheggMate’ solution insulating Chegg from external risks is highly unlikely,” according to a research note by the bank on Tuesday.
Other analysts doubt that Chegg’s A.I.-powered study tool will make much of a difference in the company’s short-term finances.
“While CHGG plans to launch the CheggMate beta this month to a select few, the timing of a full launch is unclear,” Jeffries analysts wrote in their Tuesday note, adding that they don’t expect “any meaningful impact from CheggMate” until fiscal year 2024. The analysts wrote that Chegg’s management is still figuring out how to monetize CheggMate, but the first step would be to include its advanced A.I.-powered features in existing products.
Whatever the case, the Santa Clara, Calif.-based company still thinks its CheggMate service can win against general-purpose A.I. chatbots. CheggMate said its service will give students an experience unique from ChatGPT, as it will present the edtech company’s own content and data.
“We’ve defeated all the free sites in the past pretty handily over time, and we expect that with CheggMate we will have great success going forward,” Rosensweig said during Chegg’s earnings call.
“Ultimately, we believe the introduction of CheggMate will lead to an increase in the size of the market we serve and strengthen our relationship with our users, while reducing content costs,” Rosensweig said.
Chegg and OpenAI did not immediately return Fortune’s request for comment.
