Duolingo Reports Strong Revenue but Faces Stock Decline Amidst Generative AI Challenges

In a surprising turn of events, Duolingo recently reported record earnings for 2024, with revenues soaring to $748 million, driven by a substantial increase in its user base. Despite these impressive figures, the company saw its stock price plummet nearly 20%, leaving many analysts and investors perplexed. Currently, Duolingo holds a valuation of approximately $13 billion.

The reason for this decline appears to stem from the very technology that is supposed to elevate the company’s offerings: Generative AI. With the rise of AI-generated articles attempting to explain the situation, I dug deeper into the company’s Form 8-K and the earnings call transcript to uncover the factors at play.

It is essential to clarify that the focus of this examination is solely on Duolingo’s stock price, a crucial metric influencing the company’s strategic direction. While the business has become profitable and is expected to approach the billion-dollar mark in earnings in 2025, stock value tends to overshadow all other considerations in corporate decision-making.

Strong Performance in 2024

Duolingo demonstrated remarkable growth in 2024, amassing 116.7 million monthly active users (MAUs) and 40.5 million daily active users (DAUs). The number of paid subscribers surged to 9.5 million, reflecting a 43% increase year-over-year.

This growth led to a significant revenue increase of 41% from the previous year, culminating in a profit margin that jumped from $16.1 million to an impressive $88.6 million. Additionally, the introduction of new features, including Duolingo Max, positions the company for potential bookings exceeding $1 billion in the coming year.

Reasons Behind the Stock Price Drop

Despite the strong earnings, Duolingo’s stock witnessed a dramatic decline of 26% over the past month, dropping from $421 to $295. During the earnings call, investors expressed concerns, particularly regarding the financial implications of Duolingo Max, the newest premium subscription tier.

Duolingo Max, which offers enhanced features powered by Generative AI, currently accounts for 5% of paid subscribers, approximately half a million users. However, the introduction of this service has impacted the company’s profit margins. According to their 8-K report, gross margin decreased by about 120 basis points year-over-year to 71.9%, attributed to the rising costs associated with integrating Generative AI technologies.

CEO Luis von Ahn indicated that the adoption of new features, particularly the Video Call function within Duolingo Max, has led to increased operational costs, especially as they utilize OpenAI’s APIs. He noted, “Most of our AI costs are tied to Video Call, and they scale based on Max subscriber growth,” emphasizing that optimization efforts are not a current priority.

However, Duolingo is optimistic about margins improving in the latter half of the year, projecting that Generative AI costs will continue to decline. While this is a hopeful outlook, historical trends indicate that such optimism can be precarious. Investor sentiment remains cautious about whether the anticipated cost reductions will materialize.

Future Projections and Market Outlook

Looking ahead, Duolingo expects revenues to fall between $962.5 million and $978.5 million in 2025, representing a growth rate of approximately 30%. Although this is still substantial, it marks a notable slowdown compared to the 40% growth achieved in 2024.

In response to these projections, some have drawn comparisons to Coursera’s past performance, which faced multiple earnings downgrades and ultimately resulted in a leadership change. While Duolingo has outperformed its revenue forecasts for 2024, the potential for downward revisions in the future persists.

As Duolingo seeks to diversify its offerings beyond language education into areas like mathematics and music, the need to refine its business model while managing costs associated with Generative AI remains a critical challenge. Investors will undoubtedly be watching closely as the company navigates this evolving landscape.