I’ve read through the interim report and listened to the earnings call, and I’ve gathered my own thoughts on the report here:
- At first glance, the results were quite okay compared to my own expectations, though the guidance was soft. The strong growth in cash flow was particularly positive for me.
- AI enables rapid content production; in Q1/2026, the company published 20,500 “course units.” In Q1/2025, there were 7,100 publications and in Q1/2024, 1,800 publications, meaning the volume of content production has more than decupled in two years.
- The focus is now on growing the number of daily active users (DAUs). Retention (the ratio of daily active users / monthly active users) has improved.
- Historically, the company has offered week-long free trials, which have worked well. Now, the company plans to offer longer free trials (as many other freemium apps do), e.g., 1 month or even 3 months, which is a good thing from a user perspective and should support the number of paying customers in the long run. The benefit of this is that while it supports revenue/monetization, it also supports the daily user count, meaning monetization is not in conflict with growing user numbers.
- The company is also focusing on improving the quality of instruction and the user-specific experience. An example of this is personalization. The company has always had a model that selects which exercises are given to the user. They are now trying to develop this to be much more individualized, similar to what a personal tutor would do.
- According to the CEO, the volume of content will not grow faster than the current pace because the company wants to ensure content quality. The company tests new content multiple times to ensure it is high quality. AI thus enables fast content production, but the company is careful not to just produce a lot of “AI slop,” but rather to ensure the new content is also high-quality. Over the last two quarters, content quality has increased according to the company’s metrics, while production volume has also grown.
Not much particularly special has happened in a couple of months. It feels like the sentiment around the company was already very sour before the interim report, and the Q2 guidance in particular was received very negatively; the stock dropped about 13% in after-hours trading.
In an environment of slowing growth, when a company is being re-rated (revalued), one must be able to form a view on what caused the growth slowdown and what the future direction is.
My own view is that growth has slowed for two reasons:
- The company’s virality on social media—for example, last February’s “Dead Duolingo” marketing campaign—has, in my view, accelerated the app’s popularity as a “pull-forward” phenomenon. The problem with this, however, is that as seen with Harvia in the aftermath of COVID-19, demand pulled from the future into the present becomes a headwind in the near future.
- The company’s focus on monetization, specifically by increasing friction for free users, was a “shot in the foot” regarding growth, and fixing this situation will take time.
However, I see these as only temporary headwinds for growth, and I believe that this year revenue will grow by the 15-20% guided by the company, and next year growth will accelerate. If growth slows down next year as well, then I have been wrong with my investment thesis and I must reconsider my ownership.
After the last interim report, we didn’t yet see a share price below $80, which is where I will add to the position for the last time. I believe that price level will be seen later this year. The Q2 and Q3 comparison periods are strong, and the company’s strategic shift is unlikely to show as accelerating growth within the next 6 months. Sentiment around the company is very sour, and while “AI hype” stocks are posting 100% year-over-year revenue growth and mooning tens if not hundreds of percent in days, the average investor gets FOMO because a Duolingo owner supposedly has such a high “opportunity cost” when growth slows and the share price drops. As a long-term investor, I see this as offering good buying opportunities in excellent companies, if one believes in the company’s long-term business. In my view, the management’s commentary is honest and consistent, and I believe the company can grow its daily user base by over 20% annually during 2026-2028, even if this year will be somewhat soft.
Even though my position is still firmly “in the red” (turskalla) by about 35% compared to yesterday’s price (probably over 40% once the US markets open), this doesn’t trigger any emotions in me. I admittedly made my first purchases at too high a price, but when I look at the company’s fundamentals, there isn’t much I don’t like. The company’s market cap is about 5 billion, they have about 1.14 billion in cash, and no debt. From this position, it is incredibly difficult to go bankrupt. Adjusted for share dilution, the free cash flow for the last 12 months was ~$280 million, and the cash flow yield calculated from this is about 5.5%. Revenue is growing at an annual rate of over 20% and free cash flow at over 40%.