ChatGPT threat causes education sector shares to fall

This Tuesday (May 2), panic seized investors in shares of the education sector, which proceeded to the massive sale. The result was a sharp decline in the shares of numerous companies in the area. The latter are feeling the pressure from the rise of generative AI tools like ChatGPT.

Online learning group Chegg suffered a major drop in its shares as it was the first to acknowledge cracks. The California-based company reported that its finances were seriously affected as a result of the growing popularity of AI. This news had immediate effects on the rest of the educational companies in various markets.

In this sense, the Pearson platform, listed on the London Stock Exchange, suffered an 8.7% drop in its shares on Tuesday. Many companies linked to learning fear that the rapid advance of AI will affect them before other sectors. In fact, today’s sample shows that the problems have already started.

Since ChatGPT burst onto the scene late last year, it has become a sensation for millions of people. The tool now holds the title of being the most widely adopted technology from its earliest stages of existence in all of history.

The fall of Chegg and the impact on the actions of the education sector

The ordeal seems to be just beginning for the actions of companies dedicated to the education sector. To avoid being devoured by the tsunami of generative AI, these firms will be forced to adapt to this technology. However, the latter is a big problem, since the education of future generations would have AI as its main tutor.

Thousands of analysts around the world believe that this could represent a civilizational danger. Even the philosopher Yuval Noah Harari issued a dire warning about the danger of AI for the future of humanity. In a article from The Economist, the intellectual claimed that AI had “hacked the operating system of human civilization.”

Either way, Chegg’s quarterly results announced Monday left clear testimony and pessimistic sentiment. This company specializes in selling digital guides with answers to questions about college courses worth about $20 per month. Sales revenue from these types of services plummeted -7% during the first quarter of 2023 to $187.6 million.

Likewise, the number of subscribers fell by -5% to 5.1 million people. The company withdrew its annual course response guide and its shares on Nasdaq fell -37.5% to $11 a share during after-hours trading on May 2.

As already mentioned, the blow caused by this report was felt in all the actions of the education sector. It is expected that in the future other companies in the area will also show similar results. Basically, the specific fact is that the AI ​​threatens to replicate the service of dozens of companies and offer them at much lower prices.

The education system cornered

If there is something certain in this matter, it is that the educational system is under siege. Until now, generations were educated by tutors and materials prepared by human beings. But successive generations would be groomed by AI bots, raising alarm bells like the aforementioned philosopher Harari.

In a world where the omnipotence of big technology companies is feared, this possible reality increases uncertainty. In short words, the powerful companies that develop AI tools would create an educational system tailored to their interests. Thus, Microsoft, Alphabet and others would “educate” future generations in the image and likeness of sustaining their monopolies, warn the most alarmist voices.

The aforementioned Chegg, since the beginning of the pandemic, had a boost of great magnitude thanks to distance education. Her leading role earned her the qualification of threat from the educational sectors. However, her threatening role seems to pale in the specter of generative AI.

As summarized in a recent work by FT“Schools have previously accused Chegg of allowing students to access responses they then submit as their own, and are now wrestling with the same threat from OpenAI’s widely available ChatGPT.”

Be that as it may, the reality of new technologies seems to have taken its first visible victim. The education sector received its first jolt in financial terms on Monday with the fall in shares. Although this episode is expressed in terms of money, it is a reflection of a reality in which AI interferes in society from within.

The race to adapt to the new reality

For better or for worse, education and the companies linked to it have no choice but to adapt to this new technology. Generative AI tools become a reality that seems impossible to combat or push back. Chegg CEO Dan Rosensweig himself acknowledged during the earnings call the role AI will play in human civilization.

The executive not only recognizes the transformative and disruptive role of AI, but also warns that it goes faster than people are used to. He added that education is already feeling the impact. “Since March we have seen a significant increase in student interest in ChatGPT,” she commented. Next, she noted that the tool has “an impact on our new customer growth rate.”

In that same speech, Rosensweig said that, over time, AI would clearly outperform his company. That means the company has no choice but to adopt that new technology as quickly as possible. “We are adopting [la IA generativa] aggressively and prioritizing our investments to take advantage of that opportunity,” he said.

In keeping with that approach, in April the company launched CheggMate. It is a service based on ChatGPT-4. This allows students to get personalized content through conversations with the AI. It also allows access to questionnaires.

With these advances, the fall in the shares of the education sector this Tuesday seems to be the bell for the end of an era.

The state of Chegg’s shares

Chegg is a company facing several problems, and the obsolescence of its model may be the most obvious. During the worst part of the pandemic, the company hit its prime but then began to fizzle out. The AI ​​now becomes a kind of coup de grace that would irreparably damage the company’s business.

In such a context, buying its shares might seem crazy, both in the short term and in the long term. Despite this, there is a reality that could change this perspective for a more positive one. The latter is summarized in the firm’s willingness to adapt to avoid being a victim of “natural selection.”

If the CheggMate platform lives up to expectations as efficiently as generative AI tools and is priced competitively, then the company could come out on top. Only in this scenario, the company would maintain its prestige and continue to be a reference. As for the dystopian issue, for schools it would represent a two-headed monster for students to “cheat” the education system.

But beyond those matters for future discussion, this hypothetical reality would make the actions of this company in the education sector guarantee great returns. For now, it looks like an extremely risky bet.

This recent paper reviews two AI-linked growth stocks that have a better future prospect.