• Friday, March 01, 2024
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Education companies’ shares fall sharply after warning over ChatGPT

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Declines follow admission from California-based Chegg over AI chatbot’s effect on revenue

Shares in the education sector fell sharply on Tuesday as investors bet that artificial intelligence could upend business models following a revenue warning at edtech company Chegg.

California-based Chegg, which provides online study guides, admitted on Monday evening that a “significant spike in student interest” in AI chatbot ChatGPT was starting to hurt its sales.

“We now believe it’s having an impact on our new customer growth rate,” said chief executive Dan Rosensweig on an earnings call with analysts.

On Tuesday, Chegg’s shares plunged by half and the warning rattled other companies, with shares in London-listed Pearson falling 15 per cent, language-learning platform Duolingo down by 10 per cent and US-listed education company Udemy dropping by more than 5 per cent.

The stock moves come as businesses are grappling with the opportunity and threat posed by generative AI systems such as ChatGPT, which produces highly sophisticated text outputs in response to short human prompts.

Read also: ChatGPT quizzes Japanese prime minister, Fumio Kishida in parliament

Chegg’s admission marks one of the first instances of a company acknowledging a hit to its finances as a direct result of advances in generative AI.

Big tech companies are racing to develop superior versions of the technology, with Google launching its ChatGPT competitor Bard in March. The previous month, shares in Google parent Alphabet plummeted after Microsoft unveiled a new version of its Bing search engine that included advanced new AI-driven features.

Pearson chief executive Andy Bird denied that ChatGPT was a threat to the company’s business model, saying it was a “fundamentally different business” to Chegg.

He told the Financial Times that the possibility of combining AI capabilities with Pearson’s existing intellectual property was a lucrative opportunity.

“The output of these generative AI models is largely predicted by the quality of the data sets that are inputted into them,” Bird said. “We are the owners of some very rich, pure data sets — when you start to input them into generative AI models, you get better outputs.”

Chegg’s Rosensweig insisted that the technology would “advantage Chegg” over time, adding that the company was “embracing [generative AI] aggressively and prioritising our investments to meet this opportunity”.

Chegg reported a 7 per cent annual fall in revenue in the first quarter to $187.6mn. Its subscriber numbers dropped 5 per cent to 5.1mn, and it withdrew its guidance.

Tom Singlehurst, an analyst at Citigroup, said ChatGPT could directly replicate the “study guide” service offered by Chegg, which gives students ready-made answers to questions on college courses.

However, he said that for Pearson, which creates course materials, ChatGPT was more likely to be a “second-order threat” that would “alter the way content was created by course administrators” in ways that were not yet clear.

Last month, Chegg launched CheggMate, a new service built with ChatGPT-4 that enables students to access tailored content by talking to an AI.

Colleges have accused Chegg of enabling students to cheat by accessing on-demand answers to course questions.

However, educators face an even starker challenge from ChatGPT, which allows students to generate answers to college questions and even full essays for free.

Rosensweig has called claims that Chegg is enabling students to cheat “nonsense”, arguing that the company gives underprivileged students support they would otherwise be unable to access.

“It has nothing to do with looking up answers,” he told the Financial Times last year. “These are students that have had no support for most of their life — the way we are used by the overwhelming majority of students is to learn.”

Copyright The Financial Times Limited 2023