$DUOL · Asymmetric Investing by Travis Hoium · 2026-11-04

Duolingo shares jumped 26% at the start of trading on Wednesday after the company announced truly exceptional results. It wasn't the revenue that impressed investors, but rather the size of their user base, especially on a daily basis.

If you've been following Duolingo for a while, especially here on the "Asymmetric Investing" channel, you know that the business engine isn't the booking number at the moment; Not the current number of paid users.

What matters is how quickly they fill up that marketing funnel. Daily active users are the best metric to look at, and there has been amazing growth in their numbers. This is really what the market is reacting to.

This should not come as a big surprise because management has been talking for some time about what they are pushing for in terms of user interaction. We want to increase the number of daily active users .

They have already implemented rewards for internal team members. They have allocated, I believe, $11 million this quarter alone to pay these bonuses. So, they translate their words into actions.

"Hello, we want to continue to grow the business in the long term." This will eventually pay off. This does not mean that it will pay off in this quarter in terms of net profit.

But it means it will pay off in the future. That's why the stock rose. Remember that the market is always looking to the future.

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Here's how I use "Fiscal AI" on earnings day with a company like Duolingo. They already have their own direct information. So, you can log in and take a look at the financial data immediately.

What happened to the revenue? What happened to operating profit? These are usually two things I look at immediately, and this is already available on a quarterly basis. Therefore, you see a slight increase in revenue, and actually a decrease in operating profit.

Okay, let's take a look at what's happening with these key performance indicators. There has been a rise in monthly active users and a huge increase in daily active users, but paid subscribers have not yet reached that level . I think that's the story of this quarter,

Let's start with the metrics that I consider most important for Duolingo at the moment. This refers to the number of monthly active users and daily active users. If you look back, let's go back in time a little.

Let's go back to December 2022. Continuous growth in the number of monthly active users until almost last year. There were 130 million in the first quarter of 2025, and the number increased by only 10 million over the next five quarters to reach 140 million by the end of the second quarter of this year.

This is what worries the market. Has this company transformed from a growth company to one that has begun to slow down?

Let's add the revenue growth rate because I think it tells the story here. Look, a 40% growth. Now, suddenly, the ratio has dropped into the twenties even in this last quarter.

I will explain why this number is not as alarming as the drop that occurred when we went from 40% to 30% to 20%. That was when the stock fell sharply because the market noticed that revenue growth was slowing down.

This is not something you would ever want to see.

So, how do you get revenue growth to accelerate again and return to the 20 or 30% level ? It needs to attract more people to the ecosystem. You need to have a wider base at the top of the sales funnel.

The indicator we will rely on as investors is the growth pattern of monthly active users. You can see that approximately 13 million monthly active users were added in the last quarter.

This is more than what was added in the previous five quarters.

Let's remove that and show the daily active users . There was an improvement or acceleration in the second quarter for daily active users, but this is a huge acceleration with more than 6 million additional daily users on the platform.

The administration stated that several factors contributed to this. They are working on improving the application. They have more artificial intelligence tools and conversational tools.

So, this is one of those things. I think the story of the Duolingo disorder is very easy to tell. Wait, artificial intelligence will simply disrupt this company . It will be completely finished within 5 years from now.

I don't think that will be the case. I believe that artificial intelligence will be the tool that will drive you to a platform like Duolingo, where they will use artificial intelligence to improve their application.

For example, things like conversation. I have already seen one of my daughters do that. She went downstairs, and she was using Duolingo and talking to it. She was answering a question.

This is available even in the free version. So, this is something they are testing more and actually introducing.

They are also working to simplify their pricing by offering only one premium plan. So, they are adding some of these AI tools and some of these conversational tools to the free plans, making them more valuable, in the hope that users will move to those paid plans over time.

There is a time lag between the increase in monthly active users, daily active users, and then the increase in paid subscribers. So, this is the direction we want to see; Ultimately, increasing these numbers will lead to an increase in this number, which is the revenue growth rate .

But of course, it's not all positive for Duolingo. There are two ways you should look at this . What are the current figures, and what will the figures look like in the future?

Looking at the current time, I have here total revenue in yellow, total profit in blue, and gross profit margin in purple. You can see that this gross profit margin has fluctuated a little.

It doesn't rise. We do not have margin expansion, at least on the gross profit margin side.

But let's now move on to the operational side. I will list this data here to get slightly more up-to-date information. The operating margin was actually accelerating between 2025 and the end of it.

And now you're starting to see it drop. There are two reasons for that. You mentioned that they use more AI tools in their free mode and even in their paid mode. Therefore, it will become slightly more expensive over time.

I don't think this will be a big problem because those costs are decreasing significantly. I think the administration said that having one of these conversations used to cost several dollars not too long ago, a year or so ago , and now it costs only about one cent.

So, those costs will continue to decrease, and we may even be able to transfer some of those inference processes to the device itself. We'll see how things go.

The other thing is that there is a one-time cost related to some of the bonuses I mentioned earlier. So, team, we need to increase the number of daily active users. We need everyone's cooperation to achieve this.

I will pay you more if we achieve some of those goals. This does work, but it will affect short-term operating profit. In the long run, the company will retain the gains, but in the short term this will affect margins.

So, this is why these margins are low. This is also why the market isn't too worried about it, because the market understands that "these margins will eventually rise again."

You also have, and remember these are quarterly figures , positive free cash flows for Duolingo. So, this is a company with a strong balance sheet and positive free cash flow. This is still the case.

I think that will accelerate in the future. The administration has set some long-term goals regarding this. I believe it was $700 million in adjusted earnings before interest, taxes, depreciation and amortization.

That would be an indicator of cash flow. So, things are moving in the right direction.

Now, the only criticism I have of the administration is how they use this criticism. This is a pink-tinted view of free cash flow , okay? So, you can see that it is still positive.

I will hide that. But here are the share buyback procedures. They have already added, I believe it was a $400 million share buyback program two quarters ago. They used a very small part of it .

Normally, this is not a company that would buy back a lot of shares. But look at the cash balance. There is $1.4 billion in cash that exists only on the balance sheet.

If you know that the business is starting to improve, and you believe that the stock is very well valued, which I think we can say at this stage. The price-to-equity-to-sales ratio is approximately five.

The price-to-free-cash-flow ratio is around 19 even after today's move, with growth accelerating again.

The right time to buy stocks was actually a few months ago. Now, we are reaching a point where, yes, the valuation is good, but perhaps not the best time to repurchase shares. So, that's the only criticism I have of this quarter.

Management should have been bolder earlier this year, throughout the first nine months, by buying shares when their price was much lower. You can see that stocks have fallen by as much as 50% since the beginning of the year.

If you just look at the stock price here , it was around $90 per share in April. We have now reached $160. They could have repurchased the shares at a price between $90 and $120 per share.

They had plenty of time to do that. They could have done that with hundreds of millions of dollars. They still have incoming cash. I think that was the right time to buy the stocks aggressively , but they obviously didn't.

Louis Von Ahn, the CEO who runs the company, was very reserved on this matter, and that is my only observation for this quarter.

I think the operations seem to be moving in the right direction. It may take a few more quarters for these daily and monthly active users to become paying users, but we will see that in the future.

I also expect an expansion in profit margins in the long term. Perhaps not in the next quarter or the next six months, but over the next two years as the costs of artificial intelligence decrease and they are able to make more of a difference in their business.

I think Duolingo's position is very good and outstanding.

When I was buying stocks , they didn't garner any attention, but now the narrative around Duolingo seems to be really starting to change.