Shares of Duolingo (NASDAQ: DUOL) tumbled approximately 15% in Thursday trading after the language-learning platform issued third-quarter revenue guidance that came in below analyst expectations, offsetting a better-than-expected second-quarter performance and robust user engagement metrics.
The company reported second-quarter revenue of $298.5 million, an 18% increase year-over-year and ahead of the $295.6 million consensus estimate compiled by LSEG. Adjusted core profit also surpassed forecasts. However, investor sentiment soured on the company's projection for third-quarter revenue of roughly $302 million, which trails the approximately $304 million analysts had anticipated. Duolingo maintained its full-year revenue outlook despite the softer quarterly guidance.
User growth takes precedence over near-term monetization
Management emphasized that expanding the user base remains the top strategic priority, even if it means tempering near-term subscription revenue. CEO Luis von Ahn said the company now expects daily active user (DAU) growth to stay above 20% for the remainder of the year, supported by product enhancements, improved retention, and marketing initiatives. CFO Gillian Munson noted that teams are being encouraged to focus on engagement rather than immediate monetization, a strategy aimed at achieving the long-term goal of 100 million DAUs.
During the second quarter, DAUs rose 23% year-over-year to 58.7 million, exceeding Visible Alpha estimates, although paid subscriber growth was slightly below consensus. The company credited broader deployment of AI-powered features, including Video Call, and more disciplined marketing for the engagement boost. A one-time "Streak Revival" campaign also helped bring millions of inactive users back to the platform, but executives indicated that future growth will rely more on retention and learning outcomes than on temporary promotions.
AI efficiency drives margin expansion
Lower artificial intelligence costs contributed to stronger profitability in the quarter. Munson said Duolingo has increasingly adopted open-source AI models for features that do not require its most advanced systems, reducing operating expenses and improving gross margins. As a result, the company raised its full-year adjusted EBITDA margin forecast to 26.5%, up from the 25% target set earlier this year. Gross margin guidance was also lifted, with Munson stating, "For gross margin, we now expect to end the year closer to 70% as compared to the 69% we initially expected."
Full-year guidance unchanged
Despite the softer third-quarter revenue outlook, Duolingo reaffirmed its annual financial guidance. The company continues to expect bookings growth of about 11% and revenue growth of roughly 16% for the full year. For the third quarter, it projects bookings of approximately $307 million and revenue of about $302 million. Management also disclosed that employees could receive a cash bonus if fourth-quarter DAU growth reaches at least 25%.
According to BarCharts data, Duolingo currently holds a consensus Hold rating from analysts, including two Buy ratings, 18 Hold ratings, and two Sell ratings. Thursday's decline erased part of the stock's recent gains as investors weighed the company's long-term user growth strategy against expectations for near-term revenue expansion. The selloff echoes similar market reactions seen in other growth-oriented tech names, such as The New York Times' recent slide on subscriber growth misses, and contrasts with the positive momentum seen in Shopify's Q2 results.
Investors will be watching whether Duolingo's user-first approach can sustain engagement growth without sacrificing revenue momentum. The company's AI-driven cost efficiencies provide a cushion, but the market's reaction suggests near-term expectations remain high. As seen with Lucid's recent decline, even strong operational metrics can be overshadowed by guidance disappointments.
This article is for informational purposes only and does not constitute financial advice.
