Chegg vs. ChatGPT—Why Brands Need an AI Narrative

What happened:

• Ed-tech company Chegg saw its stock downgraded by 49% after an earnings call that exposed its vulnerability to AI disruption.

Why it matters:

• Across industries, the rise of AI is opening up a whole new comms and storytelling challenge.

• Chegg is the first of many brands that will see their value rocked by equity analysts looking for industries that are not up to speed with AI.
• Any company with exposure to AI disruption has to go on the offence—painting a clear picture of how they'll leverage AI for growth and efficiency.
  

A closer look:

Chegg On Tuesday, May 2nd, the online education company Chegg had its Q3 earnings call. Chegg's stock was priced at $17.55. They had beaten their earnings estimates. Plus, a week earlier, they’d announced the launch of CheggMate, their ChatGPT-integrated product set to launch this summer. The business seemed to be on the right track. Then an analyst asked a simple question about the impact of ChatGPT on user growth.

The CEO acknowledged that they had seen an impact as students tried out this free new tool, but that it was "on the margin". They were being prudent in the short term while betting on CheggMate long term. They declined to offer a forecast beyond the current quarter.

Markets did not like the vibes. At all.

The stock immediately dropped 49% and is still down 42% three days later. Jeffries downgraded the stock because of how "AI headwinds" could affect Chegg's "fundamental story."

‍DuolingoNotably, another online education company, Duolingo, saw its stock price drop by 10% on Tuesday—even though it had no earnings announcements or news. Duolingo has been spared Chegg's fate (so far).That’s in part because when it announced its own ChatGPT integrated learning product, it called it "Duolingo Max" and specified that it was part of a new high-priced subscription tier—a sign that AI will enhance the Duolingo's offering and pricing power, not erode it.

‍PearsonMeanwhile, London-based Pearson was briefly swept up in investors’ panic. Despite beating its own quarterly earnings forecast, markets sent Pearson’s price down 15% based on the concerns that surfaced in Chegg’s earnings call. Pearson’s CEO moved quickly to directly refute any correlation with Chegg’s vulnerable business. Equity analyst notes from JP Morgan and Citi backed up that distinction, helping the stock price bounce back. However, Citi’s reassurance that ChatGPT was only a “second-order threat” to Pearson was still enough to wipe half a billion dollars off its market cap.

‍The bottom line:

• Announcing a new product that integrates ChatGPT is not enough.
• Chegg thought they had gotten ahead of it with the CheggMate announcement - but they provided very few details other than mentioning OpenAI four times and including a quote from Sam Altman. (Duolingo fared better by positioning AI as a value-adding enhancement.)
• Now is the time for companies in second wave industries like e-commerce and travel to prepare their own comms about how they'll leverage AI, not be the victim of it.