AI Threat To Stock Prices Seen Spreading As Chegg, Pearson Sink

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(Bloomberg) -- Investors are starting to see the downside from the rapid acceptance of artificial intelligence.

Shares of a California education company called Chegg Inc. plunged Tuesday after it warned that the quick rise to popularity of OpenAI's ChatGPT tool is causing fewer students to sign up for its services. And that's having ripple effects, driving shares of UK education publisher Pearson Plc down the most in more than a year.

The euphoria around AI has up to now largely been viewed as a boon for stocks. Investors have bid up shares of Nvidia Corp., which is a key supplier of chips required to power chatbots, and tech giants Microsoft Corp. and Alphabet Inc. are racing to incorporate more generative AI features in their products.

But the potential losers are coming into focus. Besides education, there's customer service: French call-center operator Teleperformance SE warned last week that 20% to 30% of its call volumes could be automated in the next three years as chatbots become mainstream.

“Management teams and investors, as well as regulators, the world over are all wrestling with how ChatGPT could change business models,” said Russ Mould, investment director at AJ Bell Plc. “No one knows what is coming next or when, something that investors need to consider when they assess the valuation of any stock they hold or are researching.”

Some companies will benefit by using AI to reduce costs: International Business Machines Corp. said it expects to pause hiring for jobs it thinks could be replaced with artificial intelligence in the coming years. And Mould points to publishing as an area where it can generate copy and support time-stretched editorial teams.

And AI's ability to answer questions quickly could increase the time users spend on a search engine home page, Mould said, rather than clicking away to find what they want. That's good for the search engine, less good for the websites relying on click-throughs, which could hit their ad income or any affiliate revenues from commissions generated by those click-throughs, he said.

Chegg sank as much as 49%, its biggest intraday drop ever, while Pearson declined 11% in London. Fellow education stocks were also slipping on Tuesday, with Duolingo Inc. falling as much as 12%, Adtalem Global Education Inc. sliding 9.8% and 2U Inc. down 10.9%, among other peers.

Meanwhile, Chinese educational stocks also closed lower in Hong Kong, including: China Yuhua Education Corp. slipped 16%, Wisdom Education International Holdings Co. Ltd. fell 7.2% and New Oriental Education & Technology Group Inc. down 2.1%.

Some of Tuesday's stock market moves may be an overreaction, said Aidan Donnelly, head of equities at Davy.

“Long term, ultimately, the need for education hasn't changed,” he said. “Some of the reaction you're seeing in some of the share prices is probably an overreaction just based on just the kind of the sentiment in the market in the very short term.”

--With assistance from Henry Ren.

(Updates stock moves throughout.)

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