Duolingo's Contrarian Bull Case Clashes with DeepValue's Growth Concerns Ahead of Earnings

What happened

Seeking Alpha published a strong buy recommendation for Duolingo, arguing that market fears of AI disruption have driven the stock to near-IPO levels despite sustained 30%+ growth, high profitability, and $1.1B in cash. However, the DeepValue report highlights that DAU growth has decelerated sequentially from 49% in Q1'25 to an estimated 30% in Q4'25, raising red flags about top-line durability. Gross margins are under pressure from rising generative AI and hosting costs tied to the Duolingo Max tier, which management frames as temporary but has yet to stabilize. At $111.04, the stock reflects a 'great product, broken stock' narrative where strong fundamentals are overshadowed by deceleration risks and margin erosion. The upcoming Feb 26, 2026 earnings report and guidance will be critical for validating whether growth can hold and margins can recover.

Implication

If Duolingo demonstrates DAU growth stabilizing around 30% YoY and gross margin improvement, the stock could re-rate towards the base case value of $125, offering modest upside. Conversely, further deceleration below 25% DAU growth or continued margin compression could drive the stock down to the bear case of $95, despite the strong balance sheet. The Seeking Alpha article's bullish view contrasts sharply with the cautious DeepValue stance, underscoring market divergence on AI disruption risks without addressing core operational concerns. Key monitoring points include the CFO transition on Feb 23 and management's guidance on AI cost optimization in the upcoming report. Overall, the asymmetric risk-reward favors a wait-and-see approach until more data confirms sustainability.

Thesis delta

The Seeking Alpha article reinforces a contrarian bullish narrative based on valuation, but it does not alter the DeepValue thesis that Duolingo's investment case depends on stabilizing DAU growth and gross margins in the next 6-9 months. Investors should maintain a 'WAIT' rating, as the upcoming earnings will be pivotal in confirming or denying these critical trends.