Duolingo's Tradeoff
Every business involves tradeoffs.
You can spend money to grow or give money to shareholders.
You can prioritize more users or more profits.
There are always tradeoffs in business that managers and investors need to keep in mind.
And those tradeoffs are hurting $Duolingo, Inc.(DUOL)$ ’s stock price today while potentially giving the company more upside long-term. More on that in a moment.
Duolingo’s Tradeoff
Six months ago, the concern with Duolingo was user growth.
The company seemed to have lost its mojo: monthly active users (MAUs) grew by only 2.9 million between Q1 2025 and Q4 2025, while daily active users (DAUs) grew by 6.1 million over the same period.
The DAU number was decent, but the top of funnel (MAUs) was weak, and that will eventually make its way to revenue growth.
Fast forward six month, and in the past two quarters, the company has increased MAUs by 7.5 million people, and DAUs are up 6.0 million.
The market’s questions have been answered…right?
Not exactly.
User growth may have improved, but there’s a tradeoff. Management focused less on monetization, which is making its way to revenue growth and margins.
On the top line, management said teams have explicitly been instructed to prioritize user growth and engagement over monetization. That’s a tradeoff, and it’s why you see revenue growth slowing while user growth is accelerating.
On the bottom line, Duolingo is using more AI conversation features, which are very expensive, to improve the learning experience. In other words, Duolingo is making the product better at the expense of revenue and profit growth.
Users love the change, but investors don’t.
And this is the tension investors face with Duolingo today.
Would you like the company to get to 100 million DAUs, as management has stated its goal is to do so in the next 3 years?
If so, the tradeoff is near-term margins and revenue growth.
But the prize is a bigger, more valuable business than Duolingo has ever been.
I’m happy with management’s tradeoffs for now and think the market will come around eventually. Duolingo’s shares trade for just 4.3x trailing sales and 15x trailing free cash flow.
And the company has over $1 billion on the balance sheet to buy back stock, make acquisitions, or just invest in the long-term.
Eventually, user growth will translate to better monetization, and that’s a result I’m willing to wait for. But shares were down nearly 10% after earnings and 3.2% last week, so the market is being a little less patient.
This is the difference between long-term investing and short-term trading. It’s all about tradeoffs for us too.
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