Duolingo's Growth Faces AI Skepticism Despite China and AI-Driven Enhancements

What happened

Duolingo's stock has plummeted nearly 50% over the past year to around $174, driven by market fears that generalized AI tools could erode its language-learning moat, even as the company reported over 40% revenue growth and expanding profitability in Q3 2025. The new article highlights Duolingo's sound business model, emphasizing AI-driven enhancements and China as its fastest-growing market, with partnerships and local AI approvals expected to boost organic international growth. However, the DeepValue report reveals underlying headwinds, including moderating MAU growth to 20% in Q3 2025 and a recent Q4 bookings guidance cut that prioritized teaching quality over short-term monetization, triggering a sharp selloff. AI competition remains a critical risk, with OpenAI demos and user backlash over content quality posing threats to engagement and pricing power, despite Duolingo's efforts like the Max tier and rapid course creation. Looking ahead, investor sentiment hinges on Duolingo's ability to sustain DAU and paid subscriber growth above 30% while demonstrating that AI features can drive durable monetization without margin compression.

Implication

The stark disconnect between Duolingo's robust fundamentals—40%+ revenue growth, 29.5% Adjusted EBITDA margins, and strong free cash flow—and its depressed stock price suggests a potential mispricing for those who view AI fears as exaggerated, but position sizing must account for high volatility and sentiment sensitivity. Duolingo's focus on China expansion and AI-driven product enhancements, as noted in the article, could support mid-20s to low-30s percent revenue growth if executed well, aligning with the base case scenario in the DeepValue report. However, investors must remain vigilant: any further deceleration in DAU or bookings growth below 20% for multiple quarters, or increased competition from AI-native apps, could justify further multiple compression and undermine the investment case. Near-term catalysts, such as Q4 2025 earnings and management updates on curriculum quality, will be pivotal in determining whether the company can stabilize growth and repair sentiment. Ultimately, this setup suits investors with a 6-18 month horizon who can tolerate uncertainty, but requires continuous monitoring of engagement metrics and competitive developments to avoid capital impairment in a high-valuation context.

Thesis delta

The new article reinforces Duolingo's growth narrative, particularly in China, but does not materially shift the investment thesis, which remains centered on sustaining user engagement and monetization amidst AI competition. Investors should view this as supportive of the base case but not mitigating key risks like AI disruption or user growth deceleration, keeping the thesis unchanged pending further financial validation. No fundamental shift is indicated; rather, the article echoes optimistic aspects already accounted for in the DeepValue analysis.