Goldman Sachs Downgrades Chegg To Sell, Cites Rising Competition From Gen-Z Using AI

Goldman Sachs analyst Eric Sheridan downgraded Chegg, Inc. CHGG to Sell from Neutral, lowering the price target to $8 from $10.

The analyst modestly lowered revenue estimates, reflecting a lower subscriber count as the competitive environment intensifies, particularly as it relates to ChatGPT and other emerging competitors leveraging generative AI. 

The analyst also slightly lowered margin assumptions to reflect flat margins in 2024 vs. 2023, driven by near-term investments in Chegg's forward AI initiatives. 

Heading into 2024, according to the analyst, investor debates will center around the impact of ChatGPT and other emerging competitors leveraging generative AI on Chegg's forward subscriber trajectory.

The analyst also remains curious about near-to-medium-term margins as Chegg invests in integrating generative AI into its product offering.

The analyst downgraded the stock owing to increasing concerns around Chegg's ability to grow its subscriber base amid rising competition at lower price points and increasing levels of investments allocated towards Chegg's forward AI initiatives (including building their own LLMs). 

While Chegg has highlighted strong retention rates, the analyst sais to have growing concern over the learned behavior of the younger generation (with regards to ChatGPT) as potentially impacting the trajectory of gross additions in future periods.

Price Action: CHGG shares are trading lower by 3.38% to $9.72 on the last check Friday.

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