Duolingo (NASDAQ:DUOL) is meant to be a growth stock in my ISA. Instead, it has been shedding value faster than a snake on GLP-1 medication.
Since I bought this stock early last year, it has crashed 65%! The digital education firm’s first-quarter report earlier this week showed slowing growth.
In contrast, Palantir (NASDAQ:PLTR) continues to report eye-popping growth. The question I’m asking myself now is: should I dump Duolingo and switch to Palantir?
A mixed quarter
Duolingo offers over 40 different languages, as well as courses in maths, music, and chess. It has a free ad-supported offering and two paid subscription tiers for more serious students.
Heading into Q1, management warned that bookings growth would be slower because it was working to improve the free user experience to capture a wider pool of learners. It’s aiming for 100m daily active users (DAUs) in 2028.
Looking at the results, I see no immediate red flags. Revenue increased 27% to $292m, beating estimates, while DAUs grew 21% to 56.5m. Paid subscribers jumped 21% to 12.5m, and the free cash flow margin improved to 50.6% ($147.8m), which is exceptional.
Looking ahead, however, management warned that Q2 bookings would slow to approximately 6%, before accelerating to approximately 10.5% for the full year. Bookings serve as the leading indicator for what revenue will roughly look like in the coming quarters.
A blowout quarter
Meanwhile, Palantir is showing no weakness. In fact, the AI software company reported another blockbuster quarter earlier this week.
Revenue skyrocketed by an astonishing 85% to $1.6bn, with full-year guidance raised to 71% growth. US commercial revenue grew by a staggering 133%, as firms continue to flock to its Artificial Intelligence Platform (AIP).
CEO Alex Karp was quick to downplay these achievements, as he said: “We are an N of 1. Our financial results now demonstrate a level of strength that dwarfs the performance of essentially every software company in history at this scale.”
It’s worth noting that Palantir isn’t just disseminating AI software to others. It’s also using the technology to reduce headcount even as the firm’s growth scales explosively.
My move
Honestly, it’s tricky to assess whether Duolingo is successfully laying the foundations to become a much larger company or its growth is over. Clearly, the market thinks the latter, given that Duolingo’s enterprise value to free cash flow is now just 11.
Personally, I think that’s far too cheap given that we see no evidence of AI disruption in its business, despite the technology already being around for years.
In Q1 alone, we published 20,500 course units…that is more than 10 times what we were shipping per quarter just two years ago. AI has fundamentally changed what is possible for us, and I believe we are just scratching the surface.
CEO Luis von Ahn
In contrast, Palantir is trading at more than 100 times trailing free cash flow. So, it’s chalk and cheese with the valuations.
As I see it, the Duolingo story is in temporary limbo (and investors hate uncertainty), whereas the Palantir growth story looks fully priced in. My assessment then is that Palantir stock is currently overvalued but Duolingo looks undervalued.
On this basis, Duolingo might be worth a look. But I’m leaving them both alone to focus on other stocks.
