Annie Tsai

While we were all entranced in a real life episode of Days of Our Lives, news outlets across the Bay Area reported on November 12, 2024 that Santa Clara, CA based education technology company Chegg laid off over 300 employees and blamed AI for it. 

Catchy and triggering, it’s effective clickbait. But Chegg’s quarterly report hints at a bigger story – one that is much more interesting and has broader implications for stock market investors.

Every fiscal quarter, publicly traded companies file what’s called a Form 10-Q with the SEC – their quarterly report. It’s essentially the financial, strategic, and operational update to shareholders detailing how the company performed during the prior quarter against expectations. It also includes discussion for any risks, significant events and forward looking outlook. 

Chegg’s Q3 2024 10-Q noted several significant shifts: a 13% decline in revenue and net loss of $212.6 million compared to $18.3 million in Q3 2023, and $2.1 million in restructuring costs tied to workforce reductions. These are big moves on their own. But the most notable event went largely under-scrutinized: a $195.7 million goodwill impairment in Q3 2024. This contributed to a total goodwill write-down of $635.4 million so far this year, meaning Chegg has entirely written off the goodwill it once carried on its balance sheet over the course of nine months. Let me explain why I think this happened, and why it’s so significant. Buckle up for a quick accounting crash course.

Goodwill is a quirky thing called an intangible asset class that shows up on a company’s balance sheet when it acquires another company for more than the fair market value of its net assets. If you’ve never taken an accounting class before, it might seem silly that this is even a thing. But essentially, goodwill is a monetary representation of the non-monetary value of a company – things like customer loyalty, intellectual property, growth potential, and brand reputation. To a layperson, goodwill seems to “balance” the balance sheet post-acquisition when a premium is paid. 

An impairment, on the other hand, is a non-cash accounting adjustment. It doesn’t impact cash flow directly, but it does reduce net income, which lowers retained earnings and equity – the portion of a company’s assets left after liabilities are paid. Impairments are triggered by significant changes in economic conditions, business performance, or technology that materially affect the value of certain assets or parts of the company. A goodwill impairment represents a reduction in the perceived value of intangible assets like brand reputation or competitive advantage that were previously recognized during an acquisition. 

Still with me? Great.

At its peak in 2020, Chegg had a market capitalization of over $11 billion with the stock trading at $115 a share. After this most recent quarterly report, Chegg’s market cap is reported to be $170 million or $1.72 a share – a staggering 98.45% decline from peak. 

This kind of drop raises questions beyond the blame Chegg places on AI. While generative AI has certainly disrupted education technology and most other industries, a decline of this magnitude points to more. Goodwill doesn’t simply vanish unless the company itself determines it no longer holds value. 

For Chegg, this goodwill impairment suggests the premiums they paid for past acquisitions were effectively wiped off the books when the expected competitive advantages and growth potential tied to these deals no longer were believed to be viable. The edtech giant’s $635.4 million write-down is not just an accounting adjustment – it’s a reflection of the broader challenges many companies are facing as they navigate accelerating technology disruption, changing consumer behavior, and economic volatility. 

Zooming out, goodwill impairments have continued to rise in 2024 with many companies across industries reporting significant write-downs. From Paramount ($5.98B) to Intel ($2.9B) to Verizon ($5.8B) to Walgreens ($12.4B) to Warner Bros. Discovery ($9.1B), businesses are accounting for that which past acquisitions and assets may no longer hold the value they once projected.

The rise in goodwill impairments this year reflects a reckoning that can’t be ignored. Many companies that grew aggressively through acquisitions during years of economic expansion are now realizing that some of those bets may no longer hold up, and many of these companies sit in our retirement and investment portfolios. With trillions in goodwill reported on U.S. company balance sheets, the question now is: what should investors do to de-risk? 

Goodwill as an asset isn’t inherently bad – it often reflects legitimate, strategic investments. However, it does create a vulnerability during economic contractions that makes research and diligence more important than ever. Understanding balance sheet details can be the difference between you having a resilient investment and having to do a write-down of your own.