Chegg(NYSE: CHGG) stock is making big gains in Tuesday's trading. The company's share price was up 12.8% as of 11:30 a.m. ET, according to data from S&P Global Market Intelligence.
Chegg is gaining ground today thanks to a research note published by Morgan Stanley analyst Josh Baer. In his write-up on the stock, Baer upgraded his rating on the education services company from underweight to equal weight. The new rating suggests that the analyst expects that Chegg will perform roughly in line with the broader market instead of doing worse than the market.
Has Chegg stock hit a bottom?
Even though Morgan Stanley's lead analyst raised the firm's rating on Chegg today, Baer actually lowered his one-year price target on the stock. Morgan Stanley now has a one-year price target of $3.25 on the stock -- down from its previous target of $6.50 per share.
With the stock trading at $3.65 per share as of this writing, the new target actually suggests downside of roughly 11%. Even with today's gains, Chegg is down roughly 68% year to date.
While Baer expects that Chegg will continue to post underwhelming results, he stated that bearish performance catalysts were already largely priced into the stock. The analyst pointed to the company's valuation profile and solid free-cash-flow generation as reasons for moving off of a bearish stance on the stock.
Will Chegg keep getting crushed by AI?
Chegg's core business revolves around providing study and coursework tools for students. Unfortunately for the company and its shareholders, the rise of artificial intelligence (AI) chatbots including OpenAI's ChatGPT and Microsoft's Copilot has seriously disrupted the value proposition of its services.
Rather than paying for Chegg's premium offerings or even providing platform engagement that can be monetized through ads and data licensing, many students are turning to AI chatbots. Even though Chegg is making moves to bolster AI-driven tech and content on its platform, the company faces some big challenges in a rapidly shifting category.
The education specialist needs to prove that it can innovate and reorient its business to keep pace with changes brought on by artificial intelligence. There's not much visibility on whether Chegg will be able to succeed on that front, and that makes its stock a speculative play even though it's seen dramatic sell-offs over the last year.
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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft. The Motley Fool recommends Chegg and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
