Duolingo's 2025 Billion-Dollar Milestone Masks Deepening Growth and Margin Risks

What happened

Duolingo reached a billion-dollar revenue milestone in 2025, underscoring its scale in the language learning market. However, this achievement belies a sharp deceleration in daily active user growth, which slowed from 49% year-over-year in Q1 2025 to approximately 30% in Q4 2025, signaling weakening top-of-funnel momentum. Gross margins have also eroded, dropping to 72.0% in the first nine months of 2025 due to rising generative AI and hosting costs from the Duolingo Max tier, pressuring profitability despite revenue gains. Market sentiment has shifted to a 'great product, broken stock' narrative, driven by guidance credibility concerns and leadership uncertainty, including a CFO transition effective February 23, 2026. The upcoming February 26, 2026 earnings report will be critical to determine if growth stabilizes and margin pressures ease, as highlighted in the DeepValue report's WAIT rating.

Implication

The immediate takeaway is that Duolingo's stock remains unattractive until operational metrics improve, with investors needing to closely monitor DAU growth for any further deceleration below 25% YoY, which would trigger downside risks. Gross margin trajectory must demonstrate stabilization around 72% as AI costs are optimized, failing which profitability could reset lower and undermine the investment case. Leadership changes, including the new CFO, add uncertainty to financial guidance and execution, potentially exacerbating market skepticism. At the current price of $111.04, the market prices in a slowdown, but significant downside exists to $95 if growth falters and margins erode further. Therefore, patience is warranted, with a focus on the next 3-6 months for data confirming whether Duolingo can balance growth and cost pressures effectively.

Thesis delta

The billion-dollar milestone confirms Duolingo's revenue scale but does not shift the investment thesis, which remains centered on stabilizing DAU growth and managing AI-driven margin pressures. Investors should look beyond this top-line achievement and await February 26 guidance and subsequent quarterly results to assess if operational headwinds are temporary or structural.