The rapid rise of artificial intelligence appears to be taking a toll on the shares of online education companies Chegg and Coursera.

Both stocks sank by more than 10% on Tuesday after issuing disappointing guidance in part because of students using AI tools such as ChatGPT from OpenAI.

Chegg, which announced a new CEO, said it expects second-quarter revenue to come in between $159 million and $161 million, lower than the $174 million expected by analysts polled by LSEG.

As a result, Jefferies downgraded the stock to underperform from hold and lowered its price target to $4 from $7, suggesting 44% downside from Monday's close.

"We question the ability of CHGG to return to durable growth as free AI tools become an attractive alternative to a paid CHGG sub," analyst Brent Thill wrote in a note Tuesday.

Chegg was last off by 20% on Tuesday, bringing its year-to-date decline to nearly 50%.

Current CEO Daniel L. Rosensweig, who will be succeeded by Nathan Schultz on June 1, touted the company's advancements in generative AI on a conference call Monday.

"We see the proliferation of AI and our ability to uniquely harness its potential in education as a transformative moment for Chegg," he said.

However, Thill questioned whether users would pay for artificial intelligence when they can get it for free elsewhere.

"CHGG has historically always beaten free competitors in the marketplace, but we believe the AI wave presents a truly credible free product experience to CHGG's paid subscription," he said.

Chegg's upbeat comments on AI were a far cry from last year's first-quarter conference call, when Rosensweig said ChatGPT was having an impact on the company's new customer growth rate.

After Chegg's most recent results, Morgan Stanley lowered its price target to $6.50 from $7 and maintained its underweight rating.

"On an absolute basis, Chegg's negative growth and margin compression illustrate there is more work ahead for the company to demonstrate that AI headwinds have shifted to AI tailwinds," analyst Josh Baer wrote in a note Tuesday.

However, JPMorgan noted that Chegg is making progress across its generational AI transformation and is confident that Schultz is the right man for the CEO job.

"We believe Schultz brings product expertise & operational knowledge as Chegg navigates its GenAI transformation & seeks to restore subscriber & revenue growth," analyst Bryan Smilek wrote in a note Tuesday. He maintained his neutral rating and cut his price target to $8 from $9.

Meanwhile, Coursera said it expects second-quarter revenue between $162 million and $166 million, below the $178 million consensus estimate, per LSEG. It also said it anticipated earnings before interest, taxes, depreciation and amortization for the quarter to be between -$2 million and $2 million, versus the $5 million expected from analysts polled by StreetAccount.

Coursera shares were last down 11% on Tuesday, bringing its decline for 2024 to 45%.

Coursera, too, is trying to use AI to its advantage.

Wall Street remains largely upbeat on the stock, but some firms cut their price targets. RBC Capital Markets, for instance, kept its outperform rating on the stock but dropped its price target to $18 from $25, suggesting 51% upside from Monday's close.

"Although we believe GenAI content/products and international self-help (e.g., local payments) should provide a lift, we expect some investor pushback on the 2H acceleration now embedded in guidance, until gaining more visibility," analyst Rishi Jaluria wrote in a note Tuesday.

Goldman Sachs also dropped its price target to $10.50 from $15 and reiterated its sell rating. The firm expects investor debates to focus on demand recovery in the near term.

"Longer term, there are still open-ended questions around the timing (in terms of adoption curves) and magnitude of how enterprises will integrate generative AI into their ecosystems and the role Coursera's platform will play within this context (which is also likely to have an impact on the Consumer segment as well)," Goldman said.

Correction: Jefferies lowered its Chegg price target to $4 from $7, suggesting 44% downside from Monday's close. An earlier version misstated the percentage.