Interactive Investor

Investors pile into Pearson after AI causes crash

3rd May 2023 13:05

by Graeme Evans from interactive investor

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A plunge in this multi-billion-pound education company’s share price is a buying opportunity, according to City experts. Here’s what happened.

Pearson logo 600

The potential for ChatGPT and generative AI to disrupt valuations in the FTSE 100 index has been felt for one of the first times after this week’s wild ride for Pearson (LSE:PSON) shares.

The education and coursework publisher lost 15% of its value on Tuesday, after the California-based learning platform Chegg Inc (NYSE:CHGG) revealed how new customer growth has been impacted by a recent “significant spike” in student interest in ChatGPT.

Faced with uncertainty about how these trends will play out, Chegg decided to be more prudent on its forward outlook by only providing guidance for the next quarter.

The signs of disruption to its business model spooked investors to leave Chegg’s Nasdaq-listed shares about half of last week’s level, even though it is also harnessing the power of ChatGPT through its own CheggMate product.

The US firm believes the future of learning is a blend of AI technology and human-based support, and has pointed to recent research showing 85% of students would prefer to have human experts involved in their study support.

Chief executive Dan Rosensweig said: “We believe that generative AI and large language models are going to affect society and business, both positively and negatively, at a faster pace than people are used to.

“Education is already being impacted and, over time, we believe that this will advantage Chegg.”

ChatGPT has been the fastest-ever consumer internet product to over 100 million users, with its real-time conversational nature offering potential for disruption across industries.

But whereas the arrival of AI chatbots is beginning to leave its mark on Chegg’s homework-help services, analysts believe comparisons with Pearson are unfair given that the UK-listed firm is more focused on content creation and exam questions.

Deutsche Bank made this point today when it said that Pearson shares had been oversold on the back of Chegg's AI comments.

In a research note headed “Error 404: AI read-across not found”, the bank reiterated its “buy” recommendation and target price of 1,140p. The shares rebounded 65.4p to 819.4p, still below the 890p seen after last Friday’s first-quarter update and £300 million buyback announcement.

Deutsche Bank analyst Benjamin Yokyong said: “We think the read-across to Pearson is limited and view the sell-off as an attractive entry point.”

Last week, Pearson reported underlying sales growth of 6% after trading in line with or ahead of expectations across all divisions in the first quarter. The highlights included strong volume growth in its Pearson Vue exam business, particularly in the nursing and IT certification sectors.

It remains on track to achieve its 2023 guidance, which includes achieving underlying sales growth of low to mid-single digits.

Under the leadership of chief executive Andy Bird, Pearson has repositioned away from traditional educational textbook publishing towards technology-enabled training and has also launched Pearson+ as an online subscription service.

He said last week that the momentum seen so far in 2023 reflected the company’s “interconnected, consumer-focused, and innovative approach”.

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