Duolingo, Inc.

NASDAQ Global Select
Back to all articles
Neutral +5

Should I dump Duolingo from my ISA and buy Palantir stock instead?

AI-generated analysis

📉 Duolingo stock has fallen 65% since early last year, prompting an investor to consider swapping it for Palantir.

💼 Duolingo's Q1 report showed slowing bookings growth but still delivered strong results with revenue up 27% to $292m.

👥 Daily active users (DAUs) grew 21% to 56.5m, and paid subscribers jumped 21% to 12.5m in the first quarter.

💰 Free cash flow margin improved significantly to 50.6%, generating $147.8m in free cash flow for the period.

🔮 Management warns Q2 bookings will slow to about 6% before accelerating to 10.5% for the full year.

🚀 Palantir reported explosive 85% revenue growth reaching $1.6bn, with full-year guidance raised to 71%.

🏢 US commercial revenue for Palantir surged 133% driven by demand for its Artificial Intelligence Platform (AIP).

🤖 CEO Alex Karp noted that Palantir is using AI internally to reduce headcount while scaling growth.

📊 Valuation contrast: Duolingo trades at 11x free cash flow, while Palantir trades at over 100x trailing free cash flow.

🗣️ Duolingo CEO Luis von Ahn stated the company has shipped 20,500 course units in Q1, a tenfold increase from two years ago.

🧠 The author believes Duolingo's growth story is undervalued due to lack of AI disruption fears despite underlying tech use.

⚠️ Palantir is viewed as overvalued because its explosive growth narrative appears fully priced into the stock.

🤷 Despite finding Duolingo potentially cheaper than Palantir, the author decides not to switch positions and waits for clarity on other stocks.

🎯 The article concludes that Duolingo's story is in temporary limbo causing investor uncertainty, unlike Palantir's steady growth.

📝 This analysis originates from The Motley Fool UK blog, which recommends considering a diverse range of investment insights.

Bullish Signals
  • Duolingo reported exceptional financial results with revenue increasing 27% year-over-year to $292 million, which significantly beat analyst estimates.
  • Daily active users (DAUs) grew 21% to 56.5 million paid subscribers jumped 21% to 12.5 million, and the free cash flow margin improved to an outstanding 50.6%.
  • Management is intentionally slowing bookings growth in Q2 by improving the free user experience to capture a wider pool of learners, which supports long-term expansion goals.
  • The company aims for 100 million daily active users (DAUs) by 2028, demonstrating strong confidence in its future trajectory and scaling potential.
  • CEO Luis von Ahn highlighted that the company published 20,500 course units in Q1 alone, which is more than 10 times what they shipped per quarter just two years ago.
  • The stock currently trades at an attractive valuation of approximately 11x free cash flow, with management noting no evidence of AI disruption in its business model yet.
  • Management believes AI has fundamentally changed what is possible for the company and that they are just scratching the surface of new growth opportunities.
Risk Factors
  • Duolingo stock has crashed 65% since the author bought it early last year, indicating severe underperformance and loss of value.
  • Management warned that Q2 bookings growth will slow significantly to approximately 6%, down from previous levels, before accelerating later in the year.
  • The market is pricing Duolingo with an enterprise value to free cash flow ratio of only 11, reflecting a lack of confidence in its near-term growth prospects.
  • Management has explicitly stated that bookings growth will be slower in Q2 because they are prioritizing improvements to the free user experience over immediate revenue expansion.
  • The author characterizes Duolingo's current trajectory as being in 'temporary limbo,' which investors typically dislike and associate with higher risk.
Full Analysis
The author of this article, who holds positions in both Duolingo and Palantir, evaluates whether to reallocate investment assets within their ISA from Duolingo to Palantir following recent stock price movements. The piece opens by noting that Duolingo shares have crashed approximately 65% since early last year, a decline the author attributes to slowing growth highlighted in the company's recent first-quarter earnings report. In contrast, Palantir is presented as a high-growth alternative with revenue increasing 85% to $1.6 billion and full-year guidance raised to 71%, driven largely by surging US commercial revenue of 133% linked to its Artificial Intelligence Platform. Despite the market's negative reaction, the author argues that Duolingo's fundamentals remain strong based on its latest financial results, with revenue beating estimates at $292 million and daily active users growing 21% to 56.5 million. The article highlights Duolingo's improved free cash flow margin of 50.6%, which stands out significantly compared to Palantir, which trades at over 100 times trailing free cash flow versus Duolingo's 11 times. Management for Duolingo warned that bookings growth will slow to roughly 6% in the upcoming quarter before accelerating to 10.5% for the full year as they focus on improving their free user experience and aiming for 100 million daily active users by 2028. The core of the argument revolves around valuation disparity and market sentiment, with the author asserting that while Palantir's growth story appears fully priced in at current levels, Duolingo may be undervalued at its current enterprise value to free cash flow ratio because it lacks evidence of AI disruption in its business model. The CEO of Duolingo emphasizes that the company has already utilized AI to increase course unit output tenfold in just one quarter, suggesting significant future potential remains untapped. Ultimately, the author concludes that while they personally believe Duolingo is worth a look given its low valuation and lack of immediate red flags compared to the overvalued Palantir, they decide to leave both stocks alone to focus on other opportunities, noting uncertainty generally unsettles investors. Ben McPoland, whose positions in Duolingo are disclosed, states that The Motley Fool UK recommends Duolingo, though views expressed are those of the writer and may differ from official subscription service recommendations like Share Advisor or Hidden Winners.