Duolingo Stock Plunges After Q4 Earnings Miss

Duolingo (DUOL) shares took a nosedive in aftermarket trading on Thursday, following the company's fourth-quarter earnings report. The language learning app's stock fell by 7.19%, closing at $348.75, despite posting strong revenue growth. The company reported a revenue increase of 39% year over year to $209.6 million, beating the consensus of $205.4 million. This increase was led by a 48% rise in subscription revenue. Total bookings surged 42% Y/Y to $271.6 million, with Subscription bookings rising 50% to $236.5 million in the quarter. Paid subscribers totaled 9.5 million at the end of the quarter, an increase of 43% from the prior year. The increase in both subscription bookings and subscription revenue was aided by a higher average number of paid subscribers. In the quarter, subscription revenue per average subscriber increased 2% on a higher mix of both family plan and Duolingo Max subscribers. Daily active users (DAUs) stood at 40.5 million, an increase of 51% and monthly active users (MAUs) came in at 116.7 million, up 32% in the quarter. Gross margin contracted by around 120 basis points Y/Y to 71.9% owing to a decline in subscription margins from increased generative AI costs. Adjusted EBITDA rose to $52.3 million from $35.2 million in the prior year quarter, with a margin of 25.0% versus 23.3% in the fourth quarter of 2023. EPS $0.28 missed the consensus estimate of $0.50. Operating cash flow stood at $83.3 million, and free cash flow came in at $87.8 million in the quarter. Luis von Ahn, Co-Founder and CEO of Duolingo said, "We intend to continue to invest in our product in order to drive engagement and user growth, as well as in features like Video Call to drive adoption of Duolingo Max."

The earnings miss was primarily due to a decline in subscription margins, which was attributed to increased generative AI costs. This led to a contraction in gross margin by around 120 basis points year-over-year to 71.9%. Additionally, the company's EPS of $0.28 missed the consensus estimate of $0.50. These factors may impact the company's long-term growth prospects by increasing expenses and potentially affecting profit margins. However, Duolingo's strong user growth, revenue growth, and free cash flow generation indicate that the company is still well-positioned for long-term growth. The company's strategic bet on AI, including generative AI, and its expansion into new subjects like math and music, also bode well for its future prospects.



In conclusion, Duolingo's Q4 earnings miss was primarily due to increased generative AI costs and a decline in subscription margins. While this may impact the company's long-term growth prospects, Duolingo's strong user growth, revenue growth, and free cash flow generation indicate that the company is still well-positioned for long-term growth. The company's strategic bet on AI and expansion into new subjects also bode well for its future prospects. Investors should closely monitor Duolingo's progress and consider the potential impact of increased AI costs on the company's financial performance.