Duolingo's 2025 Stock Plunge Reflects AI Anxiety and Strategic Pivot

What happened

Duolingo's stock experienced a turbulent 2025, peaking in mid-May with a 67% year-to-date gain before plummeting to end the year down 46%. This decline occurred despite the company posting strong quarterly earnings, including 41% revenue growth and 29.5% adjusted EBITDA margins in Q3 2025. Investors grew wary of escalating AI competition from generalized models and management's deliberate shift toward prioritizing user growth over immediate profit maximization. The DeepValue report confirms this disconnect, highlighting robust fundamentals like 50.5 million daily active users but also market fears that drove a 48% stock drop over twelve months. Essentially, sentiment soured on AI threats and strategic changes, decoupling the stock price from operational strength.

Implication

The sharp decline offers a valuation opportunity, with Duolingo trading at attractive levels given its high-growth profile and cash-generative model. However, the strategic pivot to user growth may pressure short-term bookings and ARPU, requiring adjusted expectations for near-term monetization. Key indicators to track include DAU growth stability, paid subscriber mix, and the adoption of AI-enhanced tiers like Duolingo Max. If the company demonstrates resilient engagement and successful AI integration, the stock could rebound as fears ease and growth compounds. Conversely, failure to maintain user growth or increased AI competition could justify further multiple compression, necessitating careful risk management through position sizing.

Thesis delta

The investment thesis remains a potential buy at current prices, but with a nuanced shift due to the confirmed strategic emphasis on user growth over profits. This pivot may delay profit acceleration in the near term but could strengthen long-term moats if it enhances retention and engagement. Investors should recalibrate models to account for potentially softer bookings while focusing on core growth drivers and AI monetization efforts.