Education stocks plummeted after Chegg's CEO warned about ChatGPT – but don't write off entire sectors just yet
- Chegg's stock price crashed last week after the education company's CEO said ChatGPT was impacting customer growth.
- Fellow digital learning firm Pearson also plummeted on Dan Rosensweig's warning.
The rise of ChatGPT helped feed a market frenzy around artificial-intelligence technologies this year, which has fueled a scorching rally in tech stocks like Microsoft and Meta Platforms.
But a recent rout in Chegg's stock is a reminder that the intelligent language tool isn't good news for every listed company.
The digital-learning services provider's shares plummeted nearly 50% in a single day last week after CEO Dan Rosensweig said students turning to ChatGPT for homework help could weigh on future customer growth.
Other digital learning stocks also cratered on Rosensweig's warning – but it's probably too early to label AI as a death knell for specific companies, let alone entire sectors, according to analysts.
Education stocks plunge
Chegg's first-quarter report beat Wall Street's expectations – but investors still turned on the stock after Rosensweig spoke about OpenAI's upgraded ChatGPT 4 tool in a post-earnings call.
"Since March, we saw a significant spike in student interest in ChatGPT," he told analysts. "We now believe it's having an impact on our new customer growth."
Chegg shares plunged 49% on May 2 following Rosensweig's warning – and other major education stocks sold off as well.
Shares in London-listed Pearson slumped 15% the same day, while Duolingo dropped 10% and fellow education firm Udemy fell 5%.
Don't write off the whole sector just yet
It can be tempting for investors to see disruptive technology like ChatGPT as a threat to entire industries – hence the broad and deep sell-off for education stocks Tuesday.
But it's narrow-minded to write off a whole sector based on Rosensweig's warning alone, according to multiple analysts.
The rise of ChatGPT could instead create an opportunity for education companies that are able to better demonstrate to investors that they're incorporating AI into their business model, they said.
"It's not a zero-sum game and you could ultimately see that even though AI is having a big negative impact on Chegg, it doesn't have to be all negative for all their peers," Minerva Analysis founder Kathleen Brooks told Insider.
"You could see how they could use AI to their advantage, particularly for niche subjects that rely on research from scientists all over the world. It's a great way for them to bring all of that learning together," she added.
Companies from other sectors have already seen their share price benefit from the disruption caused by ChatGPT.
In January, Buzzfeed stock surged over 200% in a day after the digital media company said it'd use OpenAI to write some stories, although it has slumped since on news of widespread layoffs.
For Morningstar analyst Michael Field, investors' rush to sell Chegg and other education stocks is a sign that markets are still looking at ChatGPT in a one-dimensional way, assuming that the technology will wipe out entire industries when it's only five months old.
"For some education companies, this tech can be a very good thing," he said. "In terms of cost base they might be able to cut staff numbers, and if they already have a very high-level product they could develop and refine it even more quickly."
"It's easy to take a side and punish a share price at the moment – but it's too early to see if ChatGPT will be really a good or a bad thing down the line."