Duolingo's Stock Plunge Highlights AI Cost and Growth Spending Tension

What happened

Duolingo's stock fell 24% in January and continued declining in February, driven by a market narrative shift after its last quarterly report emphasized increased spending to support user growth. This spending is largely directed at scaling AI-powered features like Duolingo Max, which has already compressed gross margins to 72.5% in Q3'25 due to higher generative AI and hosting costs. The company's prioritization of product investment over near-term financial performance, coupled with a CFO transition effective February 23, 2026, has heightened investor concerns about execution and cost discipline. Market sentiment has pivoted from viewing AI as a growth enabler to fearing it as a substitute for learning, exacerbating the stock's downturn amid broader AI disintermediation anxieties. Preliminary Q4'25 data shows DAU growth around 30% YoY, but the key uncertainty remains whether bookings can re-accelerate to offset margin pressures.

Implication

The stock's decline reflects a market reassessment, increasing the implied probability of the bear case where AI costs outpace booking growth, potentially driving the stock toward the $80 downside scenario. Short-term, focus should be on the Q4'25 earnings report for confirmation of DAU sustainability and booking trends, as any shortfall could trigger further sell-offs. If margin compression persists without a corresponding uplift in subscription bookings from Duolingo Max, the base case valuation of $135 becomes less tenable, signaling operational deleverage. However, Duolingo's strong cash position of over $1 billion provides a cushion for continued investment, reducing near-term solvency risk but not eliminating equity value erosion. Long-term, the investment thesis hinges on proving that AI features can drive higher ARPU to justify costs, making the next 3-6 months a pivotal window for monitoring execution under new CFO leadership.

Thesis delta

The news does not fundamentally alter the core thesis but intensifies the scrutiny on key risk factors. It underscores that the 'POTENTIAL BUY' rating is contingent on bookings re-acceleration and margin stabilization, with the increased spending amplifying the stakes. Investors should view this as a heightened alert for the thesis breakers, particularly if Q4 results show DAU growth dipping below 25% YoY or further gross margin deterioration without booking improvements.