Key insights
- Duolingo's stock dipped 14% after earnings, but the author believes its valuation is appealing at a P/E of ~20, considering its growth trajectory and potential AI benefits. AI could lower COGS and boost gross margins, although some AI-based features may be expensive. The author doubts AI will replace Duolingo due to the effort required for development and distribution, and the challenges of monetizing consumer AI. The author sees it as an interesting opportunity given its moat.
My notes on the ER is here: https://dullbusiness.substack.com/p/duol-q1-2026-the-owl-is-spending
Other high level thoughts on DUOL:
- - Even before the ER(huge growth and after hour 14% dip), the valuation is appealing. ~20 P/E and EV/NOPAT. For a 10% WACC, that means a 5% growth in the long run. I will be really surprised given their growth trajectory. * DUOL is unusually interesting in this AI age. Because the impact is multifacets: * AI will lower its COGS therefore boost its gross margin * In the ER, they said some features may actually lower the margin because those AI based features are too expensive. Interesting to see how the gross margin will develope * Will AI just nuke DUOL like the SaaS Apocalypse narrative? I highly doubt so. If you want to vibe code one Duolingo, you need huge effort on dev then huge effort on distribution. VC doing that are just stupid. On the other hand, Chatbot is still way off compared to Duolingo's polished product. Also, the big guns (OpenAI, etc) have figured out consumer AI is very hard to make money, so I don't think you can learn Spanish in ChatGPT nearly close to the result from Duolingo any time soon. * That being said, my personal experience with Duolingo is mixed. It's addictive in the beginning. But I stopped the subscription after ~2 years because I think it's impractical to really master a language that way.
In short, I think at < 20 P/E, given the growth trajectory and their moat, it's an interesting opportunity.