Shares of education companies fall sharply following a warning about ChatGPT

Investors bet on artificial intelligence to upend business models after a warning from edtech firm Chegg.

California-based Chegg provides online study guides. On Monday night, the company admitted that “significant interest from students” in AI ChatGPT had begun to affect its sales.

On a conference call with analysts, Dan Rosensweig, chief executive of the company, said: “We believe that it is having an effect on our new customers growth rate.”

The warning sent shares of other companies tumbling, including Pearson, a London-listed company, and Duolingo, a language-learning platform, down 10 percent. Shares in US-listed Udemy, an education company, also fell more than five per cent.

Stocks are moving as companies grapple with the threat and opportunity posed by AI systems that generate text in response to human prompts. These include ChatGPT which can produce highly sophisticated outputs.

Chegg’s admission is one of the very first times a company has acknowledged a financial hit as a result of advances in AI.

Google launched its ChatGPT rival Bard in march, as big tech companies race to create superior versions of this technology. Shares of Alphabet, the parent company of Google, plummeted in March after Microsoft released a new version Bing that featured advanced AI-driven features.

Andy Bird, Pearson’s chief executive officer, denied that ChatGPT posed a threat to its business model. He said it was “fundamentally” different from Chegg.

He stated that the opportunity to combine AI capabilities with Pearson’s existing intellectual properties was lucrative.

Bird explained that the output of these generative AI model is heavily influenced by the quality and quantity of data inputted. We have some rich, pure datasets. When you input them into AI generative models, the outputs are better.

Rosensweig, Chegg’s CEO, said that the technology will “advantage Chegg over time”. He added that the company is “embracing [generative AI] and prioritising investments to meet this potential”.

Chegg reported that revenue fell 7 percent annually in the first quarter, to $187.6mn. Its subscribers dropped by 5 percent to 5.1mn and the company retracted its guidance.

Tom Singlehurst, a Citigroup analyst, said ChatGPT would be able to directly duplicate the “study guides” service provided by Chegg. This service provides students with ready-made answers for questions about college courses.

He said, however, that ChatGPT would be more of a “second order threat” for Pearson who creates course material. This “would alter the way that content was created by administrators” in a manner that was not yet known.

Chegg launched CheggMate last month. This new service, built using ChatGPT-4, allows students to get tailored content simply by speaking to an AI.

Colleges accuse Chegg of enabling cheating by allowing students to access on-demand course answers.

ChatGPT poses an even greater challenge to educators, as it allows students to create answers to college-related questions, and even complete essays, for free.

Rosensweig, has called claims that cheating is possible by students “nonsense”, arguing the company provides support to underprivileged students they otherwise would not be able to access.

He said it had nothing to do last year with searching for answers. “These students have been without support for the majority of their lives — they use us to learn.”