Duolingo (NASDAQ:DUOL) saw its share price crash 21% in extended trading last night (5 November). The Q3 numbers were strong, but that’s not the issue.
The problem is artificial intelligence (AI). Management keeps trying to present this as an opportunity, but the stock market – literally – isn’t buying it, and nor am I.
Strong earnings
Duolingo’s revenues were up 41% and earnings per share were up 682%, though this was largely due to a one-off tax gain. And there’s nothing wrong with either of those numbers.
Bookings for Q4 were a little bit light and the number of daily active users was slightly below expectations. But neither of those justifies a 21% decline in the share price.
The big issue is that AI is creating new competitors for a lot of software companies. And every time Duolingo’s management talks about this, I get more and more concerned.
CEO Luis von Ahn stated that the firm is one of the few businesses to actually make money from AI. But as impressive as that is, I’m sceptical of the forward prospects for this.
AI friend or foe?
Every time Duolingo talks about its AI strengths, I get more and more worried for its shareholders. Back in April, von Ahn said the following:
“Developing our first 100 courses took about 12 years, and now, in about a year, we’re able to create and launch nearly 150 new courses. This is a great example of how generative AI can directly benefit our learners.”
The firm’s learners might well benefit, but I don’t think its business does. If AI makes building language courses that much easier, then the barriers to entry for competitors just disappeared.
To me, that looks like a really bad thing for Duolingo to be telling investors. So while the firm is trying to tell the market it’s positive, I’m not at all convinced. I could be wrong of course and if I am, the sky might be the limit for the firm.
Growth expectations
I don’t think Duolingo is going out of business. But I do see a big challenge to the firm generating the kind of growth that’s built into the multiples it’s been trading at.
GPT-5 users are already able to build their own applications for learning languages. Whether or not they’re as good, there’s suddenly a lot more competition around.
I see this as a huge issue for Duolingo, which plans on charging its users $29.99 a month to access its AI-generated modules. But who’s going to pay that when there are free alternatives?
Even if they’re not as good (and I don’t know whether they are or aren’t), these are likely to limit the firm’s ability to raise prices over time. And that looks like a major growth challenge to me.
Software disruption
What Duolingo needs is some sort of advantage over AI-generated applications. That could potentially give it pricing power, but I don’t see that it has this.
By itself, the Q3 earnings result is nothing to worry about. But in the context of an AI threat, a miss on future bookings and users coming in below expectations is more of a concern.
