Duolingo (DUOL) – Downgrade – January 20, 2024
Goldman Sachs downgraded Duolingo this week on GenAI concerns. This is the key risk facing the business today. How will it continue to rapidly innovate and stay ahead of the curve as GenAI makes its way further into education? Bears will say that Duolingo becomes obsolete when I can translate languages in real-time. Bulls, like me, say casual language learning and knowledge building are different use cases than needing to know the sentence the person in front of you is saying. People learn languages to get closer to their spouses… They learn languages because they love learning… They learn languages because they need a better job in the U.S. or elsewhere. I don’t think GenAI will remove the need for any of these use cases. Applicants who can actually speak the language will always have an advantage. Bulls will also say that language learning is simply one of dozens of lessons that Duolingo plans to offer going forward. This can’t be a $20 billion + company as the language learning powerhouse. It can grow to that size if it’s the learning powerhouse.
But sticking with language learning for now, GenAI will clearly change the landscape. I just think Duolingo, with its stellar team, unmatched dataset and split-testing machine, will stay ahead of the curve. It has a deep relationship with OpenAI with access to its latest and greatest models. It has significant internal talent to automate content creation. GenAI will disrupt and change language learning… not Duolingo in my shareholder opinion. Despite these beliefs, it’s still absolutely a risk that GenAI erodes Duolingo’s demand. While I have trimmed several times in the last few quarters, that was purely based on valuation and not this concern. I expect Duolingo to continue as the learning innovation juggernaut that it has always been. GenAI won’t change that… but accelerate it.
Source: YCharts
