The CEO of this edtech company says A.I. can help unlock growth in the space. Here’s how

Published Tue, May 9 20239:33 AM EDTUpdated Tue, May 9 202311:32 AM EDT

Christina Cheddar Berk @in/christina-cheddar-berk-b864404/

Online education company Chegg's warning last week about the dent ChatGPT has put in its business sent the stocks of many edtech firms reeling, but the market is making a mistake putting all of these companies in the same bucket, PowerSchool CEO Hardeep Gulati told CNBC in an interview. The market has a "complete misunderstanding" of the threat artificial intelligence poses to PowerSchool, he said. "Think about PowerSchool as an operating system," he explained, drawing a comparison to how Microsoft is using generative AI to enhance the features of its Microsoft 365 suite of business software. "Microsoft Office is not going to get disrupted by ChatGPT. ... They're going to, in fact, get a benefit from the fact that you can actually get better use of their Office." PWSC YTD mountain PowerSchool shares have fallen sharply since January, when they traded as high as $26.05. Gulati said PowerSchool has always expected that AI and machine learning would play a role in the company's offerings — a path it's already started on. PowerSchool's products operate on a unified platform. School systems add components as they see fit. This includes systems that can track attendance and student performance as well as handle compliance, onboarding staff and professional development. Since the system is integrated, PowerSchool is able to develop products that can mine this data and identify patterns that enable teachers to intervene to help improve a student's performance before the child falls further behind. "For us, it's not a disruption from a negative perspective, it's actually phenomenal," he said, of the advancements in generative AI. Gulati expects generative AI will make it possible for PowerSchool to accelerate its goals to offer personalized learning plans. And, he stressed, this has been the company's road map all along. It's not an idea that was inspired by the recent buzz around ChatGPT. "There's no reason the same homework needs to go to every kid. It needs to be based on what the child needs," he said. "That's the vision we have been marching on." With the proper assessments, teachers could identify the exact point where students are getting stuck in their coursework and design lessons that target the trouble spot. Still, PowerSchool shares are down 27% since the start of the year. Last week's losses cut particularly deep, and occurred despite the company posting first-quarter results that were relatively in line with analyst estimates. The company posted a net loss of $11.8 million, or 7 cents a share, on revenue that climbed 6.6% to $159.5 million, and it reiterated its 2023 forecast. Cantor Fitzgerald analyst Brett Knoblauch rates PowerSchool overweight. He said his investment thesis hinges on the idea that PowerSchool will continue to win more business from the schools that already use its products. "PWSC is currently generating ~$12 of recurring revenue per student per year across its large breadth of cloud solutions," he wrote in a research note Thursday. "We continue to believe that PWSC has the potential to increase this by 2.5-3.0x over the next decade." Knoblauch also expects international expansion to drive growth, with PowerSchool expected to open its first sales office outside the U.S. in the second quarter. "While management left its full-year revenue and adjusted EBITDA guidance unchanged, management was upbeat about demand, its pipeline, how schools are thinking about digital transformation, its role in utilizing AI to help teachers improve student outcome or create content, and its market-leading position," he said. According to FactSet, only one analyst who covers the stock rates it a hold. The rest are at an overweight or a buy rating. The stock's average price target is $26, which implies 55% upside from where it closed Monday. Gulati expects some edtech firms will be harmed by AI, especially if they are in the business of solely creating content. However, access to proprietary data is a key differentiator. Generative AI systems must be "trained" on data. The better the data, the better the result. As for Chegg, its stock has recovered some of its lost ground , but is still down 60% year to date. CHGG YTD mountain Chegg shares fell to a low of $8.72 on May 2.