Duolingo is 70% below its peak, but revenue is growing at 18%. Where's the flaw?
Daily users at an all-time high, record retention, increased profit outlook, and share buybacks at below today's price. Yet the stock dropped 12% after earnings and is 78% below last May's peak. The explanation doesn't lie in any of those headlines, but in a single balance-sheet line that stopped growing.
Key points
Daily users grew 23%, but bookings grew just 8% – and in constant currency, 6%.
By its own estimate, the company voluntarily left over $50 million on the table to remove friction for users.
Deferred revenue on the balance sheet rose 1.8% in the first half. In the same period last year, it grew 15.6%.
Reported net income fell 26%, even though pre-tax income was virtually unchanged.
Monthly users added just 10%. Daily users added 23%. That gap is the entire debate.
Duolingo $DUOL reported second-quarter results on August 5, and on paper it was a good quarter. The company beat its own May outlook in all three key metrics: revenue of $298.5 million versus $295.5 million expected, bookings of $289.1 million versus $283.5 million, and adjusted EBITDA of $77.3 million versus $71.0 million. Diluted earnings per share of 66 cents beat the analyst consensus of 62 cents. And crucially, daily active users grew 23% to 58.7 million, an acceleration from 21% in the first quarter.
The company also raised its full-year adjusted EBITDA outlook from $310 million to $320 million and its margin from 25.7% to roughly 26.5%. Compared to the February plan (margin of around 25%), that's an improvement of one and a half points. Its gross margin of 72.6% exceeded its own expectations of 71%.
The stock reacted with a drop of roughly 12%, from $135.32 to just under $120. Since the end of 2025, when it traded at $175.50, it's down about a third. The day before, Bank of America cut its rating to 'underperform' with a target price of $93. The average rating of twenty-four analysts before earnings was 'hold' with a target around $114, i.e., below the current stock price.
The gap between the earnings content and the market reaction is so wide that it deserves an explanation. It's not one overlooked number. It's two numbers that don't make sense side by side: 23% more users and 8% more money collected from customers. Who's right, the users or the cash register?