Duolingo Stock Plummets Even as User Growth Soars. Time to Buy?

Core Viewpoint - Duolingo's stock fell 14% following the release of its fourth-quarter results, primarily due to a strategic shift towards prioritizing user growth over immediate monetization, which has raised concerns among investors [1][7]. Financial Performance - Duolingo reported a 35% year-over-year revenue increase, reaching $282.9 million, driven by a 30% rise in daily active users to 52.7 million and a 28% increase in paid subscribers to 12.2 million [5]. - The company's net income surged to $42.0 million from $13.9 million year-over-year, and it announced a $400 million share repurchase program, indicating strong free cash flow generation [6]. Strategic Shift - Management is intentionally slowing down near-term financial results to focus on expanding its user base, aiming for 100 million daily active users by 2028, which involves enhancing the free user experience [7][8]. - This strategy includes an estimated investment of over $50 million in foregone bookings to support the free user experience and the introduction of new subjects like math, music, and chess [8]. Future Guidance - For Q1, Duolingo expects revenue growth of 25%, down from 35% in Q4, with full-year 2026 revenue growth projected at 15% to 18% and total bookings growth slowing to 10% to 12% [9]. - Management anticipates a contraction in adjusted EBITDA margin to about 25% in 2026 due to increased investments in marketing and AI features [10]. Market Valuation - The stock is currently valued at approximately 32 times earnings, suggesting that investors expect sustained strong growth and margin expansion [12]. - Concerns arise regarding the potential delay in reaccelerating bookings due to the strategic pivot, which may not provide sufficient margin of safety given the stock's premium valuation [12][13].