To The Moon

Duolingo’s share price collapse has been dramatic enough to reclassify it from ‘Magnificent Growth’ to something far less glamorous, closer to a forgotten compounder hiding in plain sight. Down roughly 67% from its record high and trading near the cheapest valuation it has seen since going public in 2021, the stock now sits in that uncomfortable no-man’s land where optimism has evaporated but fundamentals have not. The market’s judgement appears clear: $Duolingo, Inc.(DUOL)$ was a pandemic darling, and the party is over. I am not convinced that verdict holds up under scrutiny as we look towards 2026.

This is not an argument about whether people will keep learning languages. It is an argument about whether the market is still valuing Duolingo as a high-growth app, while the business itself has quietly morphed into something closer to a profitable, cash-generative platform with genuine operating leverage.

A misunderstood owl: broken narrative, intact engine

A Valuation Reset or a Valuation Blind Spot?

On the surface, Duolingo still looks expensive. An enterprise value to revenue multiple of roughly 7.4 times and an EV to EBITDA multiple near 60 are not numbers that typically excite value investors, especially for a stock that has already been punished. However, valuation only makes sense in context, and this is where I think the market is anchoring to old narratives rather than current economics.

Duolingo is growing revenue at just over 40% year on year, generating close to $364 million in operating cash flow, and converting a substantial portion of that into roughly $272 million of levered free cash flow. Profit margins above 40% and operating margins approaching 15% place it ahead of many consumer-facing SaaS peers growing at slower rates. On top of that, the company sits on $1.1 billion in cash with negligible debt—a balance sheet position that removes many execution concerns—yet the stock trades as if capital constraints are looming.

The key misalignment, in my view, is that Duolingo is still being priced like a revenue story when its financials increasingly resemble an earnings and cash flow story. A trailing P/E in the low 20s, following a year in which earnings surged more than tenfold, suggests the market is extrapolating decelerating growth without fully crediting the quality of profitability already achieved. This does not make Duolingo cheap in absolute terms, but it does make it cheap relative to the durability of its economics.

67% drawdown—but markets rarely price in resilient fundamentals this quickly

Operating Leverage: The Maths Behind the Owl

One insight investors may be underestimating is how quickly Duolingo’s operating leverage is beginning to show. This is not a business where growth demands proportionate increases in cost. Content, once created, can be reused, refined, and scaled globally with minimal incremental expense. As revenue per user rises, a larger share of each dollar drops to the bottom line.

This is where artificial intelligence stops being a buzzword and starts looking like a financial tool. AI-driven lesson creation, adaptive difficulty, and automated feedback reduce reliance on manual content production. For instance, Duolingo’s AI can now generate contextualised practice exercises at scale, a task that previously required linguistic experts and weeks of manual work. What was once a semi-variable cost increasingly behaves like a fixed investment, and that shift matters enormously for margins.

AI as Pricing Power, Not Theatre

The strategic value of AI here is not novelty; it is pricing power. More personalised learning paths and demonstrably better outcomes allow $Duolingo, Inc.(DUOL)$ to justify higher-priced subscription tiers without alienating its user base.

Another underappreciated advantage is data scale. Duolingo’s models are trained on hundreds of millions of learning interactions, creating a feedback loop that improves product quality over time. Competitors can copy features, but replicating that data advantage is far harder. This gives Duolingo a defensible edge as it experiments with premium offerings, assessments, and potentially enterprise-facing tools. If even a modest portion of its vast user base migrates towards higher-value subscriptions, the impact on average revenue per user and free cash flow could be meaningful by 2026.

Competition: The Threat Is Real, Not Imaginary

This is where the investment case must be honest. Generative AI tutors, conversational learning tools, and vertical specialists in maths or music are credible threats. A chat-based tutor can feel more flexible than a structured lesson, and specialist platforms often deliver deeper expertise in narrow domains.

Duolingo’s strategy is not to out-specialise specialists. It is to win on habit formation, distribution, and monetisation efficiency. That is a riskier bet than it first appears. As Duolingo expands beyond language learning, it enters markets where users may be less forgiving of ‘good enough’ content. The bull case depends on Duolingo’s ability to leverage its daily engagement and brand trust to cross-sell new subjects at lower acquisition costs than standalone competitors can manage. If that flywheel stalls, diversification becomes a drag rather than a catalyst.

Why the Shorts Are Here—and the Risk for Longs

Institutional ownership exceeding 100% and short interest near 14% of the float are not footnotes; they are signals. The bear case is straightforward. Critics are betting that post-pandemic growth normalises faster than margins expand, leaving Duolingo stuck with premium multiples but ordinary growth. In that scenario, further valuation compression is entirely plausible. The risk for longs is that sentiment deteriorates further before fundamentals reassert themselves, potentially producing near-term volatility even if the company’s longer-term story remains intact.

What those shorts are not betting against is solvency or operational durability. Duolingo’s cash position, minimal leverage, and improving free cash flow profile make it a difficult stock to break. The short interest looks more like a timing trade against expectations than a conviction that the business model is flawed.

Five years of growth, two of compression—history suggests this pattern resolves, not persists

What Would Break the Thesis?

For me, the bull case unravels if average revenue per user growth slips into the low single digits while operating margins fail to expand beyond the high teens over the next two years. That would suggest monetisation is lagging complexity. Conversely, sustained ARPU growth above 10% annually and operating margins pushing towards 20% would strongly support a re-rating by 2026.

Compounding rarely looks exciting while it’s happening

Verdict: Misjudged, Not Mismanaged

As I look ahead, Duolingo strikes me as a business the market is punishing for yesterday’s narrative rather than today’s fundamentals. It is no longer a speculative growth story, but it is not yet being valued as a mature cash generator. That gap is where opportunity lives.

At current levels, the stock does not price in perfection. It prices in disappointment. For investors willing to accept volatility and focus on execution rather than sentiment, $Duolingo, Inc.(DUOL)$ looks less like a fallen owl and more like a quietly compounding machine in the making, waiting for the market to recognise its evolving fundamentals.

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