On Tuesday, Northland maintained a Market Perform rating on Chegg (NYSE:CHGG) stock with a steady price target of $4.00. The firm's recent survey of approximately 60 college students from 11 universities across the United States indicates that ChatGPT has become increasingly popular among students, with its user base jumping from 32.5% in January 2023 to 85% currently.
The appeal of ChatGPT lies in its free access, ease of use, and customizability. Despite this surge for ChatGPT, Chegg remains a preferred source for detailed problem analysis and step-by-step solutions, retaining a 30% user rate among the surveyed students, a slight decrease from 35%.
Chegg's own AI tool, CheggMate, which offers personalized tutoring, is currently underutilized with only about 6.7% of respondents aware of its capabilities. This suggests Chegg could benefit from increased marketing to improve visibility. CheggMate leverages a vast database of educational content in partnership with OpenAI's ChatGPT, aiming to enhance the learning experience for its users.
According to Northland, while ChatGPT's growing popularity presents a competitive challenge, there is room for Chegg to increase its market share by promoting its AI-driven services more effectively. The firm notes that the current stock price could see significant volatility, considering the competitive landscape and the ongoing rollout of CheggMate.
Looking ahead, Chegg has set ambitious financial goals for itself by 2025, aiming for an adjusted EBITDA margin of over 30% and the ability to generate upwards of $100 million in free cash flow.
However, Northland suggests these targets are quite aspirational given the current market dynamics. The firm's commentary reflects a cautious but watching stance as Chegg navigates the evolving educational landscape influenced by AI technologies.
InvestingPro Insights
Chegg's current market position, as reflected in the InvestingPro data, aligns with the challenges outlined in the article. The company's market cap stands at $157.58 million, with a revenue of $683.34 million for the last twelve months as of Q2 2024. However, the revenue growth has been negative at -7.71% over the same period, which corroborates the competitive pressures from AI tools like ChatGPT mentioned in the article.
An InvestingPro Tip highlights that Chegg has "impressive gross profit margins," which is supported by the data showing a 73.4% gross profit margin. This strength could potentially help Chegg invest in marketing CheggMate and compete more effectively against free AI alternatives.
Another relevant InvestingPro Tip notes that the "stock has fared poorly over the last month," with data showing a -12.64% one-month price total return. This performance likely reflects the market's concern about Chegg's ability to maintain its market share in the face of increasing AI competition, as discussed in the Northland analysis.
For readers interested in a deeper dive into Chegg's financial health and market position, InvestingPro offers 16 additional tips, providing a comprehensive view of the company's prospects in this rapidly evolving educational technology landscape.
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