Duolingo Inc. (DUOL) saw its stock tumble nearly 17% in its steepest intraday drop since May, as investors reacted negatively to the company's growing AI investment strategy.
Despite beating revenue expectations with $209.6 million in fourth-quarter earnings—surpassing analysts' consensus of $205.5 million—concerns over profitability overshadowed the strong results. The company’s gross margin declined to 71.9%, down from 73.1% a year earlier, as higher AI development costs took their toll.
Chief Financial Officer Matt Skaruppa acknowledged that the company is prioritizing expansion and innovation over cost optimization for AI-powered tools like Video Call, an interactive feature allowing users to converse with AI-generated characters. While these features have driven engagement—particularly in Duolingo Max, the platform’s most expensive subscription tier—investors remain cautious about the near-term financial impact.
Record Growth Meets Investor Skepticism
Despite the market reaction, Duolingo closed 2024 with impressive milestones. The company’s full-year revenue soared 41% to $748 million, and net income reached $88.6 million, up significantly from the previous year. The platform now boasts 40.5 million daily active users (DAUs), a 51% increase year-over-year, with paid subscribers growing 43% to 9.5 million.
However, its adjusted EBITDA margin forecast for Q1 2025—expected to drop to 24.5%-25.5% from 25.7% in Q4—added to investor concerns. Given that Duolingo's stock had surged more than 430% since early 2022, the pullback suggests that shareholders are now scrutinizing profitability more closely.
Analysts Weigh in on Duolingo’s AI Strategy
Market analysts are divided on Duolingo’s AI-driven trajectory. Seaport Research analyst Aaron Kessler maintained a neutral rating, citing concerns over margin pressures due to rising AI costs and lower advertising revenue per user. Meanwhile, Needham analyst Ryan MacDonald remains bullish, raising his price target from $385 to $400, arguing that Duolingo’s AI investments position the company for long-term success.
Duolingo’s outlook for 2025 remains ambitious, with projected revenues between $962.5 million and $978.5 million. The company’s strategic focus on AI-powered features, particularly the expansion of Duolingo Max and its Video Call functionality, signals a long-term vision aimed at transforming language learning. Whether investors share this patience remains to be seen, but the company appears committed to betting big on AI despite short-term market volatility.
Market analysts are divided on Duolingo’s AI-driven trajectory. Seaport Research analyst Aaron Kessler maintained a neutral rating, citing concerns over margin pressures due to rising AI costs and lower advertising revenue per user. Meanwhile, Needham analyst Ryan MacDonald remains bullish, raising his price target from $385 to $400, arguing that Duolingo’s AI investments position the company for long-term success.
Duolingo’s outlook for 2025 remains ambitious, with projected revenues between $962.5 million and $978.5 million. The company’s strategic focus on AI-powered features, particularly the expansion of Duolingo Max and its Video Call functionality, signals a long-term vision aimed at transforming language learning. Whether investors share this patience remains to be seen, but the company appears committed to betting big on AI despite short-term market volatility.
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