Pearson (LSE: PSON) shares crashed 15% yesterday in a development that sent shivers throughout the wider stock market. That’s because the meltdown was caused by artificial intelligence (AI) chatbot ChatGPT, and other companies will be wondering if they are also vulnerable to the robot menace.
Just a few days ago, FTSE 100-listed digital learning company Pearson was on a roll after saying it was on track to meet annual guidance with underlying group sales up 6% and a new £300m share buyback on the way.
The chatbots are coming
In March, it reported that pre-tax profit had nearly doubled from £177m to £323m, and was on track to hit £585m this year. English test revenues were soaring, while its workforce skills unit was also doing well, as people upskilled after lockdown.
Pearson management has worked hard to turn things around over the last five years or so, after US students stopped buying its textbooks on learning that they could download course material for free instead. It survived by switching to become a digital provider, and was rewarded by a surge in demand for its eBooks, digital courseware and online learning. Now it faces another tech challenge.
Its shares lost £1bn of value yesterday, after US rival Chegg admitted that it has been hit hard by the rise of chatbot ChatGPT.
Chegg CEO executive Dan Rosensweig reported “a significant spike in student interest in ChatGPT” since March, hitting its new customer growth rate. It reported a 5% drop in subscribers and pulled its full-year guidance
Chegg’s share price completely tanked – falling by half – making the Pearson crash look relatively modest. A clearly rattled Pearson nonetheless rushed out a statement to reassure investors, claiming its business is much more ChatGPT-proof than Chegg, which offers on-demand answers to college course questions for $19.95 a month.
A Pearson spokesperson said the FTSE 100 group has a fundamentally different business model, adding for good measure: “We are a highly diversified company, with 80% of our profits coming from businesses outside higher education.”
They also pointed out that its subscription service, Pearson+, continues to grow, with user numbers up threefold since last spring.
Should I buy it?
While Chegg provides answers (and has itself been accused of helping students deliver work not their own), Pearson produces text books, courseware and learning platforms for colleges, so has more AI immunity.
Yesterday’s drop could therefore be a tempting buying opportunity. Pearson isn’t particularly cheap, trading at 14.9 times earnings, but it’s not expensive either. Its forecast dividend yield is 2.5%, which is well below the FTSE 100 average forecast of 4.2%. That’s a negative for me, as I’m currently targeting high-yielding stocks (of which there are loads right now).
Pearson management has performed an impressive turnaround, and I’m sure it will be scrambling to protect itself from the AI menace. Yet it hasn’t been a hugely rewarding investment over the last decade, its share price falling from 1,200p to 750p in that time. Over the last year, it’s down 4.05%.
Now it has a robot-shaped shadow hanging over its sector. If I owned Pearson shares, I’d continue to hold them. But I don’t, and I won’t be buying them today. I’ll sit back and see how the robot wars play out.
