Why the Duolingo share price just crashed 21%

Duolingo (NASDAQ:DUOL) saw its share price crash 21% in extended trading last night (5 November). The Q3 numbers were strong, but that’s not the issue.

The problem is artificial intelligence (AI). Management keeps trying to present this as an opportunity, but the stock market â literally â isn’t buying it, and nor am I.

Strong earnings

Duolingoâs revenues were up 41% and earnings per share were up 682%, though this was largely due to a one-off tax gain. And thereâs nothing wrong with either of those numbers.

Bookings for Q4 were a little bit light and the number of daily active users was slightly below expectations. But neither of those justifies a 21% decline in the share price.

The big issue is that AI is creating new competitors for a lot of software companies. And every time Duolingoâs management talks about this, I get more and more concerned.

CEO Luis von Ahn stated that the firm is one of the few businesses to actually make money from AI. But as impressive as that is, Iâm sceptical of the forward prospects for this.

AI friend or foe?

Every time Duolingo talks about its AI strengths, I get more and more worried for its shareholders. Back in April, von Ahn said the following:

âDeveloping our first 100 courses took about 12 years, and now, in about a year, weâre able to create and launch nearly 150 new courses. This is a great example of how generative AI can directly benefit our learners.â

The firmâs learners might well benefit, but I donât think its business does. If AI makes building language courses that much easier, then the barriers to entry for competitors just disappeared.

To me, that looks like a really bad thing for Duolingo to be telling investors. So while the firm is trying to tell the market it’s positive, I’m not at all convinced. I could be wrong of course and if I am, the sky might be the limit for the firm.

Growth expectations

I donât think Duolingo is going out of business. But I do see a big challenge to the firm generating the kind of growth thatâs built into the multiples itâs been trading at.

GPT-5 users are already able to build their own applications for learning languages. Whether or not they’re as good, thereâs suddenly a lot more competition around.

I see this as a huge issue for Duolingo, which plans on charging its users $29.99 a month to access its AI-generated modules. But whoâs going to pay that when there are free alternatives?

Even if theyâre not as good (and I donât know whether they are or arenât), these are likely to limit the firmâs ability to raise prices over time. And that looks like a major growth challenge to me.

Software disruption

What Duolingo needs is some sort of advantage over AI-generated applications. That could potentially give it pricing power, but I don’t see that it has this.

By itself, the Q3 earnings result is nothing to worry about. But in the context of an AI threat, a miss on future bookings and users coming in below expectations is more of a concern.

The post Why the Duolingo share price just crashed 21% appeared first on The Motley Fool UK.

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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Duolingo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.