Duolingo Inc. experienced a significant drop in its shares, falling as much as 22% in post-market trading. This decline followed the company's announcement that it plans to prioritize gaining subscribers, a move expected to result in slower earnings growth and narrower profit margins in the short term. The language-learning app company indicated it would increase investment in artificial intelligence and intentionally reduce monetization to accelerate user growth and engagement.
The company's ambitious goal is to double its current number of daily active users to 100 million by 2028. This strategic shift, however, has led to a cautious outlook from analysts. Bank of America, for instance, downgraded Duolingo to Underperform from Neutral and lowered its price target to $93 from $103, despite anticipating that Q2 bookings would likely exceed expectations.
Duolingo's full-year bookings forecast of between $1.27 billion and $1.30 billion fell below analyst estimates of $1.39 billion. Similarly, the company's revenue expectation of $1.20 billion to $1.22 billion lagged behind the estimated $1.26 billion. The company also anticipates that its adjusted core profit margin will decline, with gross margins expected to fall to 69% by the end of the year due to increased AI-driven costs. This strategy shift caused investor concerns, with shares already down 66% over the past year due to fears of AI disruption to its business model.
In an effort to mitigate investor concerns and return value, Duolingo's board authorized a share buyback program of up to $400 million. Despite this, the company faces skepticism, especially with daily active user growth decelerating in 2025 and projected to halve compared to previous years. Investors are keenly awaiting the Q2 results, due on August 5th, to assess the impact of these strategic decisions.
