In this Rule Breaker Investing podcast, Motley Fool co-founder David Gardner is joined by Motley Fool analysts Alicia Alfiere and Yasser El-Shimy to walk through his full 25-point risk rating system, a framework he's used for more than a decade to replace vague labels like "medium risk" with something concrete and measurable.

Using Etsy and Duolingo as live 2026 case studies, the trio scores each company question by question -- covering the business, financials, competition, leadership, and the investor's own willingness to dig deeper. Along the way, listeners get a deeper look at how studying risk is really about studying quality -- and how seeing risk clearly with a number is just another way Rule Breaker investors can learn to break the rules.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. When you're ready to invest, check out this top 10 list of stocks to buy.

A full transcript is below.

This podcast was recorded on Jan. 21, 2026.

David Gardner: Risk. A lot of people talk about it, but especially in the investment world, I've never found that talk very satisfying. First of all, how do you, how do I, how do they, define risk? What does it mean, even to say that's a risky stock? The definitions are often unclear. Then some professional analysts in the risk section of their stock research will say stuff like medium. As in, this is a medium risk stock. What does that mean? Well, more than a decade ago, I developed a 25 point risk rating system that I've used as a rule breaker investor ever since. First off, I defined risk. Well, at least what that word means to me as an investor. Then we went on not just to put a word to the riskiness of the stock, not just a word like medium, but to go on to put a number on that stock's risk, a number to give you a much more specific understanding, and that number is itself based on 25 questions asked of each stock. You know what? We're going to cover the whole thing this week, joined by my two Motley Fool friends, Alicia Alfieri and Yasser El-Shimy. We three are going to teach you the entire system, help you rate stocks yourself along this very important dynamic of risk. Only on this week's Rule Breaker Investing.

Welcome back to Rule Breaker Investing. This week, joined by two Motley Fool experts, two friends, we're diving into assessing investment risk using my 25 point risk rating system. Now, risk in equity investing, as I define it, is the potential loss of a substantial portion of capital over a significant period, like, let's say, three years. Understanding this risk at both an individual stock level and also a portfolio level is crucial. My framework, which was created to provide clarity in risk assessment, moves away from vague terms like medium risk. It's a system, and it's straightforward. We're going to ask 25 yes or no questions about a stock with no indicating a higher risk. Each no adds a point, making the higher the score, higher the risk. By the way, I love yes or no questions. I mean, the easiest, best tests I ever took were not multiple choice, which is itself easier than short answers, but instead just a binary yes or no, thumb up, thumb down. That's what we do with our risk rating system. Again, each no adds a point. Higher the score, higher the risk. This approach is not just for individual stocks. You could also apply it to entire portfolios by calculating the weighted average risk score of your holdings. This method also challenges the conventional belief that high risk equates to high reward. In fact, my own experience has sometimes found that lower risk stocks can offer greater returns, which by the way, is a truly rule breaking assertion. Now, let's delve into this system with my fellow fools, Alicia Alfieri and Yasser El-Shimy. Fools, welcome.

Alicia Alfiere: It's great to be here.

Yasser El-Shimy: Hi, David, I'm happy to be here.

David Gardner: Alicia, let me turn to you first, what are you working on these days for our members around the Fool?

Alicia Alfiere: Well, I'm on the Rule Breakers and Supernova Phoenix teams.

David Gardner: I'm really excited to hear that. I think I told you this ahead of time. My next question for you, you don't have to answer Supernova if it's not your best answer. Alicia, what is the best thing that's happened to you so far in 2026?

Alicia Alfiere: Well, the best thing so far in 2026 is that I've started swim lessons with my 10 month old daughter, and she is the splashiest baby in the whole class, the whole class.

David Gardner: Is splashy in this context, awesome? Or is it a problem?

Alicia Alfiere: It's awesomeness and the amount of water that you move around.

David Gardner: I love that you're doing that. That is fantastic. Alicia, slightly more seriously, what company will you be bringing this week, maybe just a couple sentences explaining the business.

Alicia Alfiere: Well, today we're going to talk about Etsy. Ticker E-T-S-Y, the two sided marketplace that helps craftspeople connect with buyers. The company also owns Depop, which is a fashion resale platform.

David Gardner: Thank you very much, Alicia. Looking forward to getting into Etsy with our 25 yes or no risk rating questions. Now, let me turn to Yasser El-Shimy. Yasser, what are you working on around the Fool these days for our members?

Yasser El-Shimy: Sure. I am an acting advisor on the Global Partners surface, and I help recommend companies that trade on international exchanges.

David Gardner: Fantastic. Yasser, what's the best thing that's happened to you here in 2026 so far?

Yasser El-Shimy: Boy, the fact that I was able to go to the beach in January. I highly recommend that to everybody. We drove south to Wilmington in North Carolina, and much to my surprise, it was warm enough to actually go to the beach, and the kids had a lot of fun, and they played by the water and it was a blast.

David Gardner: Well, as a graduate of the University of North Carolina, which I am, which you know about me, Yasser, you know that I love North Carolina, but I especially love Wilmington. I'm so glad that your family had a great time there. Yasser, what company will you be bringing this week?

Yasser El-Shimy: Sure, I'll be talking about Duolingo. Ticker symbol is D-U-O-L. It's a language learning platform. You can access both from a website as well as a phone app. It offers more than 40 languages, and it has risen through the years to become effectively the go to platform to learn a foreign language.

David Gardner: Chess too. Maybe we'll get into that. Well, these are two really interesting companies. Very rule breakery in their own respective ways. I say, gentle Fools, start your engines because we're going to get right into question number one here. Now, the first five are about the company. The first question that I want to ask you each about the respective companies, Etsy and Duolingo is, was the company profitable during the previous quarter and past 12 months. Profitability. Alicia, all episode long, we're going to go Etsy, then Duolingo. Alicia, what do you got for us here?

Alicia Alfiere: Etsy was profitable in the last 12 months of the year, so they had 182 million in net income. They were also profitable in their last quarter. They had a net income of 75 million.

David Gardner: That's delightful to hear. Good for Etsy. Stock hasn't been great. Glad to know the company is that profitable. Yasser, turning now to Duolingo, was the company profitable during the past quarter and past 12 months?

Yasser El-Shimy: Yes to both. It was profitable last quarter, which did include a significant one time tax benefit. For the trailing 12 months ending September 30, net income was approximately $386 million. But it's also good to keep in mind that the company first achieved profitability in 2023 and has been profitable since. In fact, that profitability has been growing over time.

David Gardner: Thank you very much. Before we move on to question number two, Alicia, why do you think we checked for both the previous quarter as well as the past 12 months?

Alicia Alfiere: Well, I would say that we want to make sure that profitability didn't just happen one quarter of the year.

David Gardner: Well said, some companies, by the way, can be extremely seasonal, so that they just have one or two quarters where they're consistently profitable and not. If you're only looking at the last quarter, you might draw the wrong conclusions. Thank you for that. Let's move on to question number two. Was the company cash flow positive during the previous quarter and the past 12 months, cash flow, Alicia Etsy?

Alicia Alfiere: Yes, it was. In the last quarter, free cash flow was about 205 million. It was also free cash flow positive in the last 12 months of the year. That was about 635 million in free cash flow.

David Gardner: Thank you. These questions, not all of them are this way, are just straight numbers. Yasser, how about Duolingo?

Yasser El-Shimy: Yes to both. Duolingo has been strongly cash flow positive, actually. For the past 12 months, ending, again, third quarter, 2025, free cash flow is about $350 million, growing by about 20% year over year. I guess the green owl can generate some cash when it wants to.

David Gardner: Well said. Both companies still at zero. Again, lower numbers, lower risk. Lower numbers are good if you're trying to avoid risk, which is not always necessarily the goal. In the end, we're not scoring these where there's a certain number that's better than any other. Alicia, Yasser, and I all know that just understanding and having context for the risk around an investment is worthwhile, especially before making that investment. Well, our first two friends were pure quantitative, but this one starts getting into the qualitative. It's still about the company question number three. Topic for number three, Alicia, is brand. Does the company's business rely on recognizable branding truly valued by its buyer base? Etsy.

Alicia Alfiere: Yes, I would say that Etsy still has a recognizable brand for the vintage, unique and homemade items.

David Gardner: Alicia, is Etsy any part of your own buying from one year to the next?

Alicia Alfiere: It is. Well, and especially having babies first Christmas. There are a lot of fun buys that had to be made.

David Gardner: It is definitely a recognizable brand. It's interesting in an Amazon dominated world. What are the other e-commerce companies at scale that have recognizable brands? There are certainly several of them, Etsy being one of them. Alicia, have you ever sold anything on Etsy?

Alicia Alfiere: No, I have not. I am not that crafty.

David Gardner: But maybe that talented 10 month old will start cranking out something beyond just splashing water. I mean, I'm not saying let's profit off our kids here, people, but, I mean, some people are particularly gifted, and Etsy is out there for them. Yasser, let's move on to Duolingo. Does that company's business rely on recognizable branding truly valued by the buyer base?

Yasser El-Shimy: Absolutely. Duolingo has over 50% brand awareness in the United States language learning market. It's a category leader in this respect. Who among us doesn't know Duo the owl. Duo the owl. It's this iconic viral marketing asset, that kind of the symbol of the company. They do a lot of very funny, very catchy, viral videos on social media and otherwise that have really created a lot of traction, a lot of goodwill, especially among younger people. A great part of Duolingo success over the years has been the fact that so much of their business has been acquired through word of mouth, as in just word of mouth marketing. They don't have to spend a lot of money to market the product. Also having a premium business model doesn't hurt either.

David Gardner: We might be returning shortly to the idea of raving fans. But let's first move on to question number four in our risk rating system. Again, four of the first five, the five are all about the company. Here's number four, Alicia. Diversification. Has Etsy diversified its buyer base so that no single customer accounts for more than 20% of revenue?

Alicia Alfiere: Yes, definitely. Over 93 million buyers and roughly 8.5 million sellers on Etsy in the last nine months of 2025. Definitely none of them, not even me with my new baby has accounted for 20% of Etsy's revenues. I'm glad to say.

David Gardner: Very well said, and it's very unlikely for a company with a broad based, in this case, commercial platform that any one buyer would be so significant. Obviously, this is a very relevant question for companies that work more in industries that are oligopolies or with one big purchaser for whom they might be a single supplier. Definitely not the case for Etsy. I'm not going to answer for Yasser, but I suspect the answer may be the same. Yasser has Duolingo diversified its buyer base so that no single customer accounts for more than 20% of revenue.

Yasser El-Shimy: One hundred percent. This is going to sound a lot like Alicia's answer. Basically, we have over 50 million daily active users on Etsy, 9.5 million of whom are paid subscribers. These, by definition, are individuals, so there is no single customer risk here, customer concentration. Also, I would say the revenue is generated both from the subscription as well as advertising and other venues, including the Duolingo English test, which is an alternative to the tofol standard exam. For non English speakers. There is geographical diversification and their revenue over 50% of Duolingo sales come from outside of the United States.

David Gardner: I had been wondering that, and that's very promising. That's very good to hear. It's fun Fools to note that both these companies basically have tens of millions at a baseline, whether we're talking about buyers on Etsy or users on Duolingo. Then they have single digit millions in terms of the real activity, ie., you mentioned, Alicia, 8.5 million sellers and Yasser 9.5 million premium accounts. They're similarly positioned both at where they are in their company history and also within the context of their industry and what they do. Let's move on to the final question number five here for the company. It's back to what we've already foreshadowed, raving fan. In your estimation, Alicia, does Etsy overall receive positive word of mouth from its customers?

Alicia Alfiere: I'm going to bend the rules here and give them a half point because I think this is questionable. Etsy is well known, but Etsy the marketplace, in its latest quarter, saw a decline in active buyers and GMS per active buyer, so gross merchandise sales. This is a trend that the company experienced in 2024, too. On top of that, according to comparatively, right now, Etsy has a net promoter score of a -7.

David Gardner: Good.

Alicia Alfiere: That's not great. During the pandemic, as you recall, Etsy was very popular, especially because you could buy homemade masks on the platform. Right now, I'm giving them a half point and calling it questionable.

David Gardner: This is the Rule Breaker Investing podcast, so you're absolutely invited to break our rules. It is a reminder to me to mention, especially for listeners hearing this system for the first time. Make it your own. One thing that I've done with this system, which I personally like about it is every question is equally weighted. I'm saying that, number one, profitable now is just as much as having raving fans or not. You might disagree. I could easily see people wanting to start waiting things. For me, that way lies madness, but the main point is making it our own. Yes, I love the half point assignment there. Alicia, subtle rule breakery well played. Yasser, how about Duolingo? Does Duolingo, overall, receive positive word of mouth from its customers?

Yasser El-Shimy: Again, I'm going to steal Alicia's thunder here, and I'm going to give the exact same answer, which is to say half a point. It works both ways. Duolingo does have great brand awareness. It's also a lot of word of mouth recommendations in terms of adoption. If you look at their app store ratings, for example, they're generally high, about 4.7 out of five. That's not bad at all. I talked a little bit also about the viral social media presence and the millions of followers on the various social media platform. However, they do have net promoter score that's -1, which does indicate that some users have had issues with things like billings and pricing and other issues that they've complained about. But I would say, overall, I'm leaning more yes than no, but if you want to give it half a point, we can give it half a point.

David Gardner: I like that. Let's give it half a point. We'll keep them even. In fact, I'm keeping ongoing score here. You can score us along at home as well. I think we're at 0.5, a half point for each of these two companies as we close out the company section. The next section, which is also five questions, number six through ten, is the financials. Here's where we're going to get into the financial statements and assessing the risk that we see in Etsy and in Duolingo, looking at the financials. Number six, question number six, turning back to Alicia, did Etsy Alicia increase its sales? By 10%-40% annually in the previous three years.

Alicia Alfiere: No, it did not. It saw only single digit revenue growth in 2023 and 2024. Though 2022 did get to 10.2% on top of that, gross merchandise sales. The amount of sales that flows through the platform has been falling. That was down 6% for the first nine months of 2025 and that's due to the sale of Reverb, which was platform for gently used musical instruments, but it's mostly due to a decline in the GMS or gross merchandise sales in Etsy. The company blamed that on a difficult retail market and consumers being under pressure and that's important because Etsy takes a toll or fees from the sellers on its platform to make money. But if you asked me that question a few years ago, I would have had a much more exciting answer because Etsy was a pandemic darling.

David Gardner: It was indeed. I'm also wondering tariffs and how meaningful or not that is for Etsy's business. Alicia, we might get into that in a little while. But thank you for that answer. We give them a no. Therefore, that is a plus one for Etsy. Let's turn now to Duolingo, Yasser, did Duolingo increase its sales? I'm going to explain a little bit why I have this parameter that I'm putting out there. Did the company increase its sales by 10% to 40% annually in the previous three years?

Yasser El-Shimy: Yes, absolutely. Annual revenue growth has been at least 40% over the past three years. In fact, the CAGR or the compound annual growth rate over the past three years is 42%. Obviously, with the law of large numbers, that might moderate in the years to come and next year, but ultimately, this is still a fast growing company. That's also profitable.

David Gardner: Well, that is good news. Yet, I'm going to adjust the number, Yasser based on what you just gave me because I believe you said that the three year annualized top line is 42%?

Yasser El-Shimy: Correct.

David Gardner: That is actually outside my parameters of 10-40%. I don't want to rain on the parade here, but we're going to give Duolingo a plus one, as well. And that enables me briefly to explain why I selected the parameter that we use, because to me, you want to have growth, first of all, if you don't have growth, that's a riskier stock right there. I think double digit growth, Alicia, to your point, 6% not quite good enough. Double digit growth is definitely preferable. Yet, friends, if we see really high, strong growth rates, while I love that as an investor, and some of our best stocks have extremely high growth rates. From a risk standpoint, what starts to happen is sometimes the market locks in on expectations that those numbers will stay high, and stocks become riskier when they're growing so fast. As an investor, I like to see 42% growth to be a stickler and true to my system here, I'm going to assign a plus one. Let's do that together, Yasser to Duolingo, as well, because it's growing so darn fast, it's a little bit risky.

Yasser El-Shimy: It's a good problem to have.

Alicia Alfiere: That makes sense, because if we look at Etsy during the pandemic, so 2020, 110% increase in revenues, that fits with the risk.

David Gardner: Yes, it does. Yasser, did you want to reflect anything before we move on to Number 7?

Yasser El-Shimy: No, that's a fair point, David. I would say that I might take issues in terms of that. Sometimes you get this lumpy, very high rates of growth, as in the case of Etsy when it's pandemic and everything thrown into the air. Whereas, I think with Duolingo's, revenue growth, it has been more sustainable and well built on strong foundations, and you can see that in the cash flow and the profitability.

David Gardner: I hear you. I also recognize this is a little bit of picking nits, slightly ridiculous because if it was just 39%, not 42%, I'd say zero, we don't have to add a plus one. With that said, just staying true to the system, I'm going to give it a plus one. I can understand how somebody might give it a plus 0.5, but I'm glad we got to make the overall point because I like investors to be thinking that high growth rates are not just awesome, they're also adding risk to the overall thesis around a company. Let's move on to Number 7. Number 7 is entitled Independence. Alicia, can Etsy operate its business without relying on external funding, independence?

Alicia Alfiere: I'm going to give them a half point here, as well. I would say that they can if they made some different choices. Right now, Etsy has more debt than cash, and it recently issued some convertible debt, then repurchased shares with some of the proceeds. The company is a cash generator, but its buybacks in 2024 and so far in 2025, have outpaced its cash generation. Now, investors generally like share buybacks, and they can be a great way to share value with shareholders. But in this case, especially with gross merchandise sales falling on their marketplace, I'd really like to see that cash be reinvested back into the business. I'd like to see less buybacks, but it doesn't look like that's going to happen as the company just announced a $750 million share repurchase plan. That is on top of 200 million that was left on their last repurchase plan. We're talking about almost one billion dollars for share repurchases in its back pocket.

David Gardner: Wow. I love the nuance there. Thank you for that background, Alicia. I would say, especially for listeners who are newer to the market, it's not always that easy to determine whether a company can operate its business without relying on external funding unless you are somewhat adept with financial statements. I've always tried to democratize as much as possible investing and make it, as Einstein would say, as simple as possible but no simpler. But there you have the benefit of a professional analyst looking at things going, actually, surprisingly, their share buyback commitments are in some ways, creating a necessity to go back to the market, which I would say adds to the risk of a company. Thank you for that 0.5, noting that, let's turn back to Yasser. Yasser, how about Duolingo and its ability to operate independently?

Yasser El-Shimy: It can operate independently. I do not foresee Duolingo needing any external financing for the foreseeable future. The balance sheet is in pretty good shape, over $1.1 billion in cash on short term investments. It generates tremendous amounts of cash flow, operating cash flow of over $360 million, just in the last 12 months. I think they're going to be fine.

David Gardner: Let's give them a check there. Let's keep moving the score now. By the way, this is not a competition where lower, higher is better. We're all just learning about risk together. Well, I'm keeping a running score here. I have Etsy at two right now and Duolingo at 1.5. Let's move on to number 8. Number 8 is disclosure. Alicia, does Etsy maintain a high standard of disclosure consistent with SEC guidelines?

Alicia Alfiere: Yes, all of its Qs and Ks and proxy statements are in order.

David Gardner: Yasser, how about Duolingo? Is it maintaining a high standard of disclosure and keeping the SEC happy?

Yasser El-Shimy: Absolutely. Again, it's filing, everything that needs to be filed on a regular basis for the SEC. It's also giving shareholders pretty simple to use in investor relations website. They do produce actually very detailed quarterly shareholder letters, which not all companies do. I like that communication from the CEO toward the shareholders.

David Gardner: That's really good to hear, not only that, but that's where we're going next with number 9. But before we go there, I do just want to mention that sometimes companies have problems. Even if they have a great balance sheet, sometimes they say things like, we've just discovered something internally, we can't actually report our earnings on time. It might be delayed by a week, those kinds of situations, which to me, add to risks. When companies are consistent with high standards of disclosure, of course, they get a yes here, but sometimes we don't always see a yes for number 8. We did hear, though. Let's move on to Number 9. As I just mentioned, talking with Yasser, this relates in a lot of ways to number 8. Here we go. Alicia, transparency, I call this one. Would an intermediate investor find Etsy's financial statements and management ownership disclosures relatively easy to sift through and understand? Alicia, yes or no?

Alicia Alfiere: Yes. Jumping off of yes or's earlier points, they have a good investor relations page. Again, all of their 10Ks and Qs are there. They even have investor presentations, if you like to see visual representations of numbers.

David Gardner: That is fantastic. This one is a shout out to investor relations department, sometimes to websites, the efforts that companies make to help educate their shareholders or anybody who's interested in researching the stock. Yasser, turning out for a Duolingo, I think you are starting to answer this with number 8, as well. Anything you want to add about what I assume is high marks for the transparency and efforts that Duolingo makes to coach and teach investors.

Yasser El-Shimy: Correct. If you want to be really nitpicky, you can say, Well, they're using some adjusted metrics for EBIDL. But of course, they explain how they do the adjustments and they explain how the non GAAP measures come about in the investor letter. If you want to learn more about that, you can. There's also if you want to talk about ownership structure, there's Class A and Class B shares. But again, all of that is perfectly laid out and explained in the filings.

David Gardner: Sounds benign enough. We're going to say yes for these companies for both 8 and 9 disclosure and transparency. Let's go to the final one for financials, and it's number 10. It's called Well Managed. Alicia, did the company report a return on equity of 15% or more in the previous year?

Alicia Alfiere: No, it did not, and that's a result of the negative shareholder equity due to Etsy's large scale buybacks.

David Gardner: These things are all connected. Well, there are many ways of judging how well managed a company is, but this one just looks at financials and how well the company is allocating. We just heard unsurprisingly, that Etsy is not doing great with this one. Plus one for Etsy. Yasser yes or no, did Duolingo report a return on equity of 15% or more in the previous year?

Yasser El-Shimy: The last reported return on equity is almost 40% for Duolingo. However, it was not that way for the previous part of the year where it was actually below 15%. The reason why the return on equity was so high at third quarter was because of that one time tax benefit that I had mentioned earlier. But generally speaking, the direction of ROE for Duolingo has been up and to the right over the past three years.

David Gardner: There are many ways of looking into financial statements. We're now closing up the financial section here, and we ignored a lot of other things I care about and look at, for example, how much cash the company has on its balance sheet, how much debt. How about return on equity in the mark of 15%? What can that teach us as investors?

Yasser El-Shimy: Well, usually it's a very quick signal to most investors about how well management is doing in terms of generating returns for the business. Positive, profitable returns for the business, and there are many ways that that can be gamed, either by stock buybacks or some acquisitions or debt taking debt for some reason. But generally speaking, it's a fair indicator of how efficient and how well management is allocating capital and generating returns on those allocations.

David Gardner: Thank you for that. As we close up the financial section, let me just mention, I don't think I actually used the phrase return on equity at any point in my Rule Breaker investing book of last year. This is not necessarily something that rulebreakers, in particular, pay that much attention to. Many of our Rule Breaker companies can't put up a great mark because they're at an earlier stage. But in general, a company that can create return on equity of 15% or more is basically consistently compounding shareholder capital add a good attractive rate without relying on excessive leverage and other ways, as Yasser mentioned, to manipulate their financials. It's not the only number that counts here, but looked at in relation to the other 24 questions, it's all part of our mix. O with that said, we've now covered 10 of our 25 questions. We've had some quantifiable ones. We've had qualitative ones, we're going to continue with a nice mix as we proceed forward to section Number 3. Now, section Number 3 is all about the competition. Our next three questions are focused on competition, something very important for every company, I would say, especially rule breaker like stocks, including Etsy and Duolingo. In fact, I should update the score before we jump forward, one section. I have a Etsy presently counting up to three and Duolingo counting up to one and a half. Again, the higher the number, the higher the risk of the stock we're researching. Let's now move to the competition section and question Number 11. Alicia, I entitle this one Underdog. Is the company here, is Etsy free of any direct competitors that have substantially greater financial resources? Is the company free of any big dogs turning it into an underdog?

Alicia Alfiere: No, Etsy is not free of direct competitors that have more financial resources. Etsy has 1.5 billion in cash and short term investments, and it has more debt than that at almost three billion in long term debt. Amazon, while it does have some debt, has more resources than Etsy and so does Shopify. Again, they have debt, but they have cash more than Etsy.

David Gardner: Not surprising at all that a company like Etsy, which I do view as an underdog, and that is the name of question number 11, that it might have some big competitors in its e-commerce space. Yasser, what about Duolingo? Is Duolingo free of any direct competitors that have substantially greater financial resources?

Yasser El-Shimy: I would say Duolingo is more of a top dog than an underdog. It is a market leader. It has competitors like Babel like Rosetta Stone, which are well established, but Duolingo does surpass them in terms of fuser based revenue share and brand awareness. I would say it's a top dog.

David Gardner: I agree. That's a real contrast. At least as I recall, I think Etsy got started before Duolingo. If that's true, Etsy has been around longer, has had more opportunity to grow, compound, and be nasty as a competitor, and yet it is much more vulnerable. Duolingo is in a position, admittedly in a smaller industry, but is in a position where it is not the underdog. Plus one, then, for Etsy bringing it up to four, let's move on to question number 12, looks at the other side of the coin. Number 12, I've entitled Goliath. Let me turn to Alicia and Etsy. Alicia is Etsy free of any disruptive upstarts, visibly challenging its business model.

Alicia Alfiere: There are no true disruptors in this space that are completely changing the model, but there are smaller alternatives to Etsy. There's Folksy for handmade goods in the UK, and that looks a lot like Etsy to me. There's also Society6, if you want art prints, even Michael's opened up a marketplace for creatives to sell. No disruptor per se, but definitely a lot of competition.

David Gardner: Would you want to give it a half point here, or do you say, yes, it is free of disruptive up, starts visibly challenging its business model.

Alicia Alfiere: I think we give it a half point here just because of all of the interesting alternatives.

David Gardner: Well said. I agree. Yasser, what about Duolingo? Is Duolingo free of any disruptive upstarts visibly challenging its business model?

Yasser El-Shimy: If you look at the price chart of Duolingo over the past year, it's down over 50%, which are completely divorced, by the way, from the fundamental performance of the company on the top and bottom line. The reason for that decline, stock is basically halved is that there's so much worry about the possibility of large language models and AI to disrupt the language learning niche in which Duolingo operates. A lot of people think that Gemini, in particular, Alphabet's AI model can be a player in this area. However, there is no direct competition yet to Duolingo.

David Gardner: I'm going to move us for at least a half point here because I do think AI is a visible challenger that could undermine Duolingo's business model. Yasser, you know this company better than I do. I see you half nodding. This is an audio only podcast, but we do see each other over Riverside, and I see you willing to concede at least a half point. Do you think this is a half point, or is this a plus one?

Yasser El-Shimy: I'll give it a half point. The reason is I'm still not entirely sure that there is a viable business model or at least that there is a viable alternative that has come to the surface. Not that it cannot happen, but I see that Duolingo does have some competitive advantages that make it extremely hard to disrupt. Perhaps we will talk about that when we talk about the MOT in the questions come.

David Gardner: Let's do that. You're doing a good job leading us forward each time, because indeed, question Number 13 in the final in our competition section is entitled MOT. Turning back to Etsy and Alicia. Alicia, would potential new competitors face high economic, technological, or regulatory barriers to entry?

Alicia Alfiere: No. There are some barriers to entry and creating the platform and attracting the talent. But we're not talking about something that's terribly capital intensive, like an airline or with lots of regulations, like in pharmaceuticals or biotech.

David Gardner: That's a no. Therefore, that is a plus one, adding to the risk of holding or buying Etsy stock. People can set up their site on Shopify and all of a sudden be selling that same quilt, possibly crocheted by a ten month old. Therefore, I think, earning a premium because that would be really special. Yeah, that can just happen pretty easily these days globally. I hear you on the plus one for Etsy as we close out question 13. I now have Etsy at 2, 3, 4, 5.5 on our risk rating system. Yasser, what about Duolingo? Would potential new competitors face high barriers, whether economic, technological, or regulatory to enter its market?

Yasser El-Shimy: I would say, yes, there are high barriers to entry. Duolingo does enjoy a significant mote. I would say it's one of scale and as well as network effects. Duolingo has over 500 million users effectively that provided it with data constantly, which it can use to train its own AI models and integrate AI into its offering. It has strong brand recognition. But more importantly, I think Duolingo has really excelled at not only teaching language, but making it almost addictive. It's habit forming, language playing. There's gamification, there's social network aspect to it. You're checking on other people on how they're doing. You also have your own streak that you must keep alive at all costs. [LAUGHTER]

David Gardner: Is it time now for us to reveal Yasser your own language of choice on Duolingo and your own streak? I think it is time.

Yasser El-Shimy: Sure. My language of choice is Italian, and my streak is 1,400 days. [LAUGHTER]

David Gardner: Sounds like you're rounding. How many exact days Yasser?

Yasser El-Shimy: Well, I'll have to open the app for that.

David Gardner: Yes, you will, but I think we need to hear it because one of the things I learned when I was bouncing on my daddy's knee is round numbers are always lies.

Yasser El-Shimy: There you go. To be perfectly exact, my streak is 1,399 days. [LAUGHTER]

David Gardner: Wow. That was really close. That's quite remarkable. Obviously, Yasser, you're somebody who's got to know this company really well. It's always fun learning from an analyst who really knows the product or service well. Yasser, it's often been said by people that, Yeah, Duolingo is actually just a video game company that happens to use language as its content to drive user interest and activity. I've always viewed that, of course, as a lifelong gamer myself as a high compliment. Because it really is a beautifully designed set of game experiences that recur, add some variety, and keep people engaged. Some of the brightest people I know for as many as 1,399 days.

Yasser El-Shimy: Exactly. The best part of it, it's actually free to use.

David Gardner: Which is remarkable. I do pay, though, and I'm a shareholder and a side note. It's been disappointing watching the stock because this stock, as you well know, Yasser, many of our listeners probably not keeping up that often actually with Duolingo, but the stock touched a high of about 500 last year. Less than a year ago, and right now it's about 150. As you mentioned, part of the story of the stock is maybe a disconnection from the financial results based on worries and fears around disruptive AI. I think that's accurate?

Yasser El-Shimy: That's absolutely accurate. David, this is when I get most intrigued and interested in a stock, and there is that disconnect between fundamental performance and price action. Any number of very successful Rule Breakers that have gone through the years have had drawdowns of 50% or more, only to come back and make new highs.

David Gardner: Both of these really interesting, sometimes volatile stocks. We've just finished more than half our questions. That was the competition section. As we enter Section Number 4, which is about the stock. The questions we ask about the stock. I've counted Etsy at 5.5 and Duolingo at two. Let's keep moving. Alicia, question 14 is just market cap, something near and dear to the heart of this show. Number 14 is entitled Market Cap. Now, that is a phrase near and dear to any longtime listener of this show because the Market Cap Game Show is a game show we've made about market cap. The question that we use for our risk ratings, Alicia, for Number 14 is, does Etsy have a market cap of more than $10 billion, yes or no?

Alicia Alfiere: No, it does not. It's six billion.

David Gardner: That's a plus one. This one straight up quantification. Any number that you pick for market caps is a little bit arbitrary. Let's just all acknowledge that up front. If you asked two died in the wool, longtime Wall Street analysts, What is a mid cap stock? I think you'd get two different ranges, but directionally, I realize I'm asking you to intuit what I'm thinking, Alicia, but why do you think I favor $10 billion?

Alicia Alfiere: Well I'd imagine it's because it gives you a reflection of a company that's been more established, has been around for a while, and therefore, hopefully has a little bit less risk.

David Gardner: Yeah, and none of these, of course, is a single factor decision you're making about a stock. It's all to see the overall body of work here, the 25 questions that we ask. But I think it really is relevant to ask about a company's market where is it, roughly? Because at a certain size, companies are less risky if they have resources, if they're sizable enough to have large customer bases, etc, that definitely lowers the risk at least 1/25th of the way. This is one of our 25 questions. Yasser, how about Duolingo? Does the stock have a market cap of more than 10 billion?

Yasser El-Shimy: No, it does not. Its market cap is about seven billion right now.

David Gardner: That's, of course, less than half of what it was just about a year ago. Really interesting to follow. Plus one for both of these companies, let's next move to Beta, which is question Number 15. Is this stocks Beta less than 1.3 over the past 12 months? That's the question we ask, and before I ask Alicia about Etsy, I'll just mention, Beta, for those not familiar, many longtime investors will be, is basically just measuring how volatile a stock is. If a stock moves up and down by about the same amount as the S&P 500 every day, week month year, it has a Beta of 1.0. If it moves up or down more spasmodically, accelerating on highs, declining further on lows, then it would be an over 1.0 ratio. I use 1.3 as a dividing line between more volatile stocks above 1.3 or less volatile. Now with Beta, a little bit explained my own bias toward using a certain number. Alicia, is Etsy's Beta less than 1.3 over the past 12 months?

Alicia Alfiere: Yes, it is. It's 0.85, so it moves pretty closely, tracks pretty closely with the overall market.

David Gardner: Excellent. Let's turn right back to Yasser now. Yasser, what about Duolingo?

Yasser El-Shimy: The answer is no. The Beta has been all over the place over the past 12 months, starting the year around 1.7, ending the year around 1.1. But in between about June, July of last year, we witnessed a spike above 2.5.

David Gardner: Wow.

Yasser El-Shimy: Yeah, the answer is no.

David Gardner: This is a very volatile stock. Before we move on to Number 16, where we're going to look at the price to earnings ratio, I do want to point out that for a lot of market observers, Beta is what they use to measure the risk of a stock. They're basically saying it's a risky stock if it's jumping up and down, and it's not a risky stock if it doesn't move much. Obviously, I give a little nod with one of my 25 questions to Beta right here. But I don't spend a lot of time looking at Beta myself, and I would say, risk is much deeper than just looking at how volatile a stock is. This is one of my favorite ones because I like to delve triple underline this point, especially for people new to thinking about risk and what is medium risk or high or low risk for stocks. That's why I love numbers, not just labels, in a world in which people tend to use a single number, the Beta to estimate how risky they think a stock is.

Yasser El-Shimy: As a wise man once said, volatility is the price of entry for outsized returns.

David Gardner: Well said. That's actually, [OVERLAPPING]

Yasser El-Shimy: That wise man being you, David.

David Gardner: Well, that's kind of you. I think Aristotle said something like that. I'm sure Morgan Housel has a great line about that. Yes, I will not accept any personal credit there, but thank you. I do think that volatility, especially for Rule Breaker stocks, is going to come with a territory. Not everybody who listens to this podcast from one week to the next is necessarily searching Rule Breakers or would say that they are a died in the wool Rule Breaker investor. But it is worth pointing out that for classic, our biggest winners, those seven plus 100 baggers that I've picked in the past, yeah, they got cut in half more than once, and you had to sit there on your hands and watch it happen if you really wanted to earn crazy good returns. Let's move now to question Number 16. As mentioned, it's entitled P/E ratio. Here's the way I phrased it. Yes or no, Alicia. Does Etsy have a positive price to earnings multiple that is less than 30?

Alicia Alfiere: No, it's 39, and that's pretty expensive when you compare it to something like eBay or Amazon. Though it is cheaper than Shopify's, I believe it's 115 times the last 12 months earnings. For Etsy itself, that's actually not the worst valuation that we've seen. That was back in 2020, and it averaged just under 100 times price to earnings.

David Gardner: Which is quite remarkable. I will say, as a Rule Breaker investor, I'm not afraid of high P/E ratios. I do believe much of the world is trained to think that you would never want to buy a stock with a P/E ratio, let's say, a 50 or higher than that, certainly. Yet, some of my best stock picks had even higher P/E ratios than that and went on to become 100 baggers. Intuitive Surgical is one example. I personally am not afraid of high P/E ratios, but with that said, we're examining the risk of stocks, Yasser. Here, a higher P/E ratio is naturally going to add to the riskiness around a stock. If that company comes out with disappointing earnings or a surprise number, that stock will get hurt more to the downside than many other companies with lower P/E ratios. Yasser, how about Duolingo? Does Duolingo have a positive P/E multiple less than 30?

Yasser El-Shimy: The answer is yes, but right. Technically, it did have a 19 times P/E ratio for the last 12 months. However, again, as I alluded earlier, there was a one time tax benefit that Duolingo benefited from in the last quarter, which really did impact how these results can be construed. Therefore, I think, in this case, it might actually be more instructive to look on a forward looking basis. It trades at 38 times next 12 months, P/E. Therefore, I don't know if you want to give it half a point or a full point.

David Gardner: Let's give it a full plus one there, just because I do like to generally remain true to the system and not scatter a whole bunch of half pointers everywhere, but that's just my own stylistic leaning. I could easily imagine people who like more nuanced stuff going, Well, that's actually a three quarters of a point or just a.25. But let's go with a straight classic plus one because the company does not have a P/E multiple less than 30. By the way, I always say, does it have a positive price to earnings multiple meaning you want to have earnings. That's going to lower the riskiness of a stock. It is always a positive P/E multiple that is less than 30. Well, thank you both. We've just closed up the stock section. By my counting, we now have Etsy at 7.5 and Duolingo at 5. Let's move on to questions Number 17 and 18. This is about the people, something that matters greatly to Rule Breaker investors. Two questions are dedicated to looking at what some people term the human capital of a company. Let me turn to Alicia. This one Number 17, Alicia is entitled founder. Any of the key Etsy insiders still have at least a 5% stake in the company?

Alicia Alfiere: No. Today, the lead independent director, the former CEO, and executive chair, the former CFO, and the current CEO combined, own just over 1%. To be fair, that is a fair amount of money. It's something like 64 million, but yeah, not 5%.

David Gardner: Not even close to having any key insider who really, really feels strongly the weight up or down of the performance of the stock. Again, this doesn't on its own, mean it's a great stock or a very bad stock. It's just part of the overall panoply, part of the overall view that we take of companies. At least in the case of Etsy, we don't see anybody who's founder like a significant stakeholder. Yasser, how about Duolingo? Any key big stakeholders among insiders?

Yasser El-Shimy: Yes. Both co founders, Luis von Ahn, who is the CEO, as well as Severin Hacker, they each hold significant stake in the company. Luis von Ahn owns approximately 7.1%. Severin Hacker owns about 6.5% of the company. They are well above the 5% threshold.

David Gardner: Yasser, why do you think we even include this in our risk rating system? What does it mean to have significant stakeholders active at a company?

Yasser El-Shimy: To borrow a phrase that our CEO Tom Gardner likes to use, we like CEOs who have skin in the game. We want to know that the CEO, the operators, they care about the company. They are fully invested in the company. They wanted to succeed and therefore will shepherd it in that direction.

David Gardner: Very well said. Let's move on to one more people question about risk. Number 18 is entitled tenure. Alicia, do the top three officers at Etsy have more than 15 years of combined leadership at Etsy?

Alicia Alfiere: Yes. I would say they have more than 15 years of combined service. The new CEO has served in different roles at Etsy since 2011. The CFO has been there a year, and the chief product and technology officer has also been a Etsy for several years.

David Gardner: It's nice to know. Yes, that's certainly, in my mind, going to reduce the risk profile of a company. If you have people who've been around, been there, done that, institutional memory, and presumably haven't been fired for incompetence. They're still there working, even if their stock is volatile or hasn't been awesome in the last few years. Yasser, how about Duolingo tenure, do the top three officers at Duolingo have more than 15 years of combined, I like Alicia's tweet there, of combined service at the company?

Yasser El-Shimy: Yes, easily. Just the CEO on his own, has about 14.5 years of experience or service at Duolingo. The average management tenure is around six years. Recently, they replaced her CFO, and the new CFO actually came from the board. She already had been serving at the company for many years. Yes, easily, they surpassed that.

David Gardner: Wonderful. Those are our two questions about the people, and my ongoing tally suggests that Etsy is at 8.5, and we have Duolingo at five.

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David Gardner: Let's move to our next two. We start getting into new territory, non standard territory in our last seven questions that we ask in my risk ratings system 19 and 20, I'm going to give them both right now. Then we're going to go through them one at a time. The first one is called the Stock Advisor Way. Because I initially used this system a lot for Motley Fool Stock Advisor, we like to say, what do members who use Motley Fool's Stock Advisor expect to see? What fits well with Motley Fool's Stock Advisor? I would then say, if we could say yes in answer to this question, we would say that company's less risky, if we give it a no just like any of the other questions we're asking, we'd say that's a little riskier. Nineteen is the Stock Advisor way, and 20 is about conscious capitalism, something that recurs frequently on this podcast. I know we have new listeners all the time. If you've never heard this funky phrase conscious capitalism, feel free to google it or go to consciouscapialism.org, and you'll learn more or just read Chapter 4 of my book, Rule Breaker Investing, where I say, that's one of the habits we need to develop as investors to follow the tenets of conscious capitalism. Anyway, that's Number 19 and number 20. Alicia, let's go now with Etsy, and the Stock Advisor Way question we phrase this way. Is this a solid business with proven management and a stalwart balance sheet? The reason I use those words is because that's often what we think we're promising when we make a new stock advisor pick whoever's making the pick at stock advisor from whichever team. We realize there's a Motley array of different companies, but we think most of our Stock Advisor members like things like solid business, proven management, stalwart balance sheet. What about Etsy?

Alicia Alfiere: I'm going to to say no here. I have a lot of questions on the business. As I mentioned before, gross merchandise sales are decreasing. As for the proven management. We have a new CEO, though she has been with the company for many years and also served as CEO for Etsy's other company Depop, which again, is that online marketplace for clothes. I am interested to see what direction she takes the company, but it hasn't been very long, so I can't say there's proven leadership here. As for the balance sheet, I mentioned this earlier, 1.5 million in cash and short term investments, but also nearly three billion in long term debt. I'd like to see more cash than debt to be able to call in balance sheets stalwart. We're going with no here.

David Gardner: A no is a +1 in our system. I realized +1 is cool in a lot of other contexts. People are like, +1 that comment. For what we're doing here, +1 means riskier stock. The higher the risk rating, the higher the risk of the stock. Plus one for the Stock Advisor Way, 'cause Alicia says no on Etsy. Yasser, how about Duolingo? Is this a solid business with proven management and a stalwart balance sheet?

Yasser El-Shimy: Is absolutely a solid business. It has been growing profitably over the past three years. It has a strong balance sheet, over $1 billion of cash. It is led by what I would consider a visionary co founder and Luis von Ahn. He's been at the company for, as we said, 14 plus years, strong track record of growth, innovation. All in all, the answer is yes.

David Gardner: A solid yes, for the Stock Advisor Way and for Duolingo. By the way, this little section, Stock Advisor Way and conscious capitalism I call go tos, because these are go to questions, really hitting at the heart of what we're seeing when we look at this company and thinking about the highest ideals of what we want to see solid business proven management. Stalwart balance sheet. For me, conscious capitalism counts deeply, too. Well, at least 125th of the way they're toward estimating risk around any stock. Let's now go to conscious capitalism and Alicia. Let's talk about Etsy. Here's the question. Alicia, I management looking out for the interests of all stakeholders, which would be, for example, customers, of course, employees, shareholders. This is one of those qualitative questions. Alicia, what do you think when it comes here to Etsy?

Alicia Alfiere: I would give them half credit. I think for the most part, though they can probably be better. I think that where they're getting dinged here would be the sellers, and it's because that they increased the toll that they take from its sellers. I'd imagine as a seller that can be pretty frustrating. They have transaction fees, payment processing fees, listing fees, other fees. Then if you want advertising, there's fees for that. But at the same time, does give sellers that platform to be able to find buyers, even if you're just starting out and you're really small business. I think that's really important. I think in terms of buyers, having the value proposition of being able to find a unique item in the marketplace, I think, is good. For shareholders, buybacks probably make some of these shareholders happy. I've talked about my concerns with it because I think that cash can be used elsewhere.

David Gardner: I like it. Half a point. We want to be able to say yes every time and not add any risk at all, but a half point here for Etsy. Yasser, how about Duolingo in the area of conscious capitalism?

Yasser El-Shimy: I would say yes. Duolingo, it starts with the mission, really. I mean, the mission is to make education here free and accessible for everybody, which does benefit the user. Anybody can download an app, can start learning a new language or a new skill like math or reading or piano, music. There's a lot that Duolingo offers and a lot that it offers for free. Now, importantly, the CEO has been making it almost his personal cause to continuously offer more value to the user over time without necessarily charging everything upfront. The last part is, I don't know if you follow Luis von Ahn on LinkedIn, but please do yourself a favor and do. Because he's constantly talking about his employees and the culture at Duolingo, and all the ways Duolingo is working to make everybody who's based in their headquarter office in Pittsburgh, by the way. He talked about the fact that they refused to move to Silicon Valley. They want to stay where they are and the fact that they give, for example, their employees full two week break during the holidays. For Christmas, New Year's, two weeks off, nobody shows up to the office. Everybody has to switch off. I love that. I love that about him, and it shows a great deal of conscious capitalism.

David Gardner: It's an American city that lost its NFL head coach very recently, but has retained the corporate domicile of a major player in the greater city of Pittsburgh, Pennsylvania. That's really cool. I did not know that. Well, by my tally as we enter the home stretch here, our final five questions. Right now, we have Etsy at 10 and Duolingo at five. Let's now move to the Final 5. Since this is the Motley Fool, these are my Motley Fool friends, analysts and advisors, geniuses, the last section is, of course, foolishness, how could it not be? The last five sections I categorize under a Motley category that I like to call foolishness. There's a trick to a few of these, and I'll just put it out there upfront. Questions 21 through 25 are foolishness, and 21 itself, and 25 itself are intentionally designed so that you can only answer, no. That is, it's going to add to the risk of a company. Why is that? Well, it's because I didn't want to design a system, where if you answered yes, all the way through, you ended up saying, my gosh, the risk of this company is zero. That doesn't make any sense to me because, of course, just crossing the street in life has some small measure of risk. I intentionally rigged it so that Questions 21 and 25, we'll do 21 first are no. I'm not trying to telegraph your answers. Alicia and Yasser, you can disagree if you want, but let me turn to Alicia. Number 21 is entitled Immaculate with a question mark. It's entitled Immaculate? Here's my question. Alicia, is Etsy certain to be fault free and fraud free in all its corporate statements and deeds? Yes or no.

Alicia Alfiere: I'm going to go with no here, David.

David Gardner: Why would you go with no?

Alicia Alfiere: Well, I mean, it would be lovely if we could be certain of these things. But as you said there is always going to be risk in investments. What I like about this question and your Question 25, which I think people will also enjoy, is this really encapsulates the fact that there is always going to be risk. You cannot be certain that a company will be fault free and fraud free for all time. Not possible. I wish it were, but no.

David Gardner: I do, too, and some of my worst stock picks ever were companies that were highly esteemed at the time. I'll give a quick example, Krispy Kreme doughnuts. I really like Krispy Kreme, and it's a beloved brand and a business that grew up in Winston Salem, North Carolina, a city I know pretty well. It was public and very successful for a while until we discovered that there was a little bit of chicanery going on and how they were scoring store openings and the value of franchising. All of a sudden, I watched my Krispy Kreme stock pick for Motley Fool Stock Advisor lose more than 90% of its value a shocker, and one I'm still a little sad about. Companies come back, management got replaced. But you would have thought, surely Krispy Kreme beloved brand doughnuts. Clearly, this is going to be fraud free, maybe not even quite fault free, but clearly, and it turns out I was wrong. Thank you for that, Alicia. Let me now turn quickly on this one to Yasser. Yasser, is Duolingo certain to be fault free and fraud free in all its corporate statements and deeds?

Yasser El-Shimy: No, you can never be certain of any company to be fault free or fraud free. That's always a risk that we're going to carry as investors.

David Gardner: Thank you, +1 for each of those. No is the answer to question Number 21. Number 22 makes its own separate point. One I like quite a lot. It turns the question back to the questioner. It actually asks each of us as we look at the stock. I'm going to ask Alicia her personal feelings here about Etsy. I'm going to ask Yasser his personal feelings about Duolingo, and you, dear listener. Whichever stock you're researching, owning, thinking about, this is for you. That's why question Number 22 is entitled You. Here's the question. Do I want to know more about this company? Am I willing to dig deeper, learn more and ask questions on the discussion boards to actively try to understand this company? It's a personal reflection. Of course, my point here, and I'm quite serious about it is, if you say yes, then that's not as risky a stock for you because you are interested in it. You probably already know quite a bit and you want to know more. You are literally lowering the risk of that investment for yourself. If you say no, because it's your buddy's pick or somebody in your investment club said, This is a good company, but you're not actually going to study it more. That's a riskier investment for you. You is Number 22. Alicia, what is your answer in regards to Etsy?

Alicia Alfiere: My answer is yes, although perhaps not for the normal reasons. I find businesses in general, interesting and exciting. Etsy in particular, I think what's been fascinating is the fact that they were a pandemic darling and how much they've fallen since then. Sometimes we can find interesting opportunities in companies that were former pandemic darlings, sometimes not. Sometimes where they are is completely earned. I also like to study them so I can understand patterns for the future so that I can see things when I look at the next company and say, I've seen this before, and then what does that mean?

David Gardner: Very well expressed. Pattern recognition such a rule breakery thing. Well said, Alicia, thank you. Yasser, based on the interest, I might even say passion, and we can count the days, if you like, 1399. I'm guessing. I think I know the answer to this question, but I'll still ask you, Yasser El-Shimy, do you want to know more about Duolingo? Are you willing to dig deeper, learn more and ask questions on our discussion boards, if you like, to actively try to understand this company.

Yasser El-Shimy: I do, and I am. I was a Duolingo user before I became an investor, and that obviously speaks to the interests I had in the company and the fact that I was satisfied as a user to the point where I came to view the company favorably and therefore consider investing in it. We always look forward to learning more about companies which intrigue us, which interest us, and Duolingo is that kind of company for me.

David Gardner: I'm glad to hear that. I personally am not really surprised that you both said yes to this because when I asked you what company you'd like to bring to our risk rating discussion this week, you brought one of your own choice. I think that's a great check in the question Number 22, you question. But as we now move on to Numbers 23 and 24, which have their own mini game going on, I do just want to underline one more time, dear listener, fellow fools everywhere. You're going to have less risk in your portfolio if you populate it with stocks that interest you, companies that you know, or even if you don't know that much, my gosh, technology, everything's changing. New stuff's coming out. If you're to learn more, you really are lowering the risk of any investment you're making. If you don't feel that way, it doesn't mean never buy a flyer stock or something crazy. Maybe it's fun, but it's definitely riskier for you, isn't it, if you don't really know much and aren't willing to learn more. Tripple underlining Number 22 here as we move on to the pair, Numbers 23 and 24. I'm just going to read out the question that I've sent to both Alicia and Yasser. Question numbers 23 and 24 sound very similar. Let me just go ahead and read 23 right now. Here it is. Write or we might say ask the single best, most beautiful and illuminating question you can about this company and answer it. Yep, that's Number 23. We're inviting you, the listener, you the stock researcher to add your own question into our framework. This is an opportunity for you to think outside of the normal bounds of the financials, the people and other sections here and just thinking, What is the most creative and important and maybe fresh question that you could ask about this company? Question number 24, by the way, is what is the second best, most beautiful, and illuminating question you can ask about this company and answer it. We're just going to do that, and then I'm going to make a quick point about why we do that after we do it. Let's go to custom question number 1. Number 23. Alicia, what is the single best, most beautiful, and illuminating question you can ask about Etsy, and please answer it.

Alicia Alfiere: Well, I have stolen this question from you. This is actually from our penalty box questionnaire, if you'd like, which goes through and tries to determine, hey, how is this company doing? Should we box it? This question is purpose. Can you reaffirm the true importance and value of this company, what it provides to today's real world? Yes, I can. It's important because it allows artisans a place to sell their items and reach a huge audience of buyers, for buyers and allows them to find unique vintage, handmade, and customizable products.

David Gardner: I think that is a great question to ask about this company. It's purpose here. Of course, I think purpose matters a lot for every company, but some of them matter more to the company than others, especially smaller companies. If they have bigger purpose, that's a really good sign. Some really big companies don't seem particularly purpose-driven to me, not so good a sign, in my opinion. Thank you for that, and the way that you answered it was a yes. Not a plus one, a yes, keeping it at zero. Let's go now, number 23, to Yasser, asking his best, most beautiful, and illuminating question about Duolingo.

Yasser El-Shimy: My question is going to be hopefully illuminating. I don't know about beautiful; that might be too much to expect here. But my question is, is Duolingo's mode defensible against free AI-powered language tutors? My answer is yes, I would say investors have a right to worry about this, and we can definitely see that reflected on the price chart. However, I do think that people use Duolingo not simply for language instruction. I think that's probably the part that the market is missing and where the disconnect is. The market thinks that if an AI model comes up with a program or a model that helps you learn a language, perhaps more efficiently, then you're going to go with that as opposed to Duolingo, completely ignoring the network effects, the benefits of scale, as well as the game of fed experience and the social network-like experience that users have. My answer would be yes.

David Gardner: I think that is a beautiful question. I know you said it may not be beautiful, but at least in Warren Berger's words, author, former guest on the show his wonderful a more beautiful question. That is a beautiful question. It is obviously at the heart of the investment scenario right now, a stock that we find less than half where it was a year ago. Yet the company seems by most measures to be doing quite well. Thank you very much. Really, that does hit right at the heart of the investment scenario. I agree with you. I'm a bull. I'm a shareholder, as well. I appreciate you thinking the social network, like, people send stuff to each other, little gifts and encouragements, and that social capital which exists in the app. I'm not sure I see an AI. Possibly sterile AI experience coming along and really heavily disrupting that. For the market to be repricing the stock in such a way that that seems very fearfully evident or possible, I disagree with that a little bit. We'll see, though. Great question. That was both Alicia's and Yasser's best questions about their companies. If I heard it right, that was a yes to both, so no plus ones there. Let's go now to question number 24. Then I'm going to want to make a short point about why we do 23 and 24. But back to you, Alicia, what's your second-best, most beautiful illuminating question about Etsy?

Alicia Alfiere: It's again from the penalty box questionnaire, which I feel like perhaps one day we'll have its own show, its own episode.

David Gardner: Thank you. Let me jump in quickly, Alicia, because not everybody understands what you're saying, and I want to make sure everybody does. We have services to the Motley Fool. We hope you love them. We hope you're signed up for them, dear listener. You can start with Motley Fool Stock Advisor. That's our cheapest broadest service. A lot of people get started there. We have many different types of services. The ones that I historically worked on, we created something called the penalty box, where we would take a stock. We would say to members, We don't like it right now. That doesn't mean sell it. Just like in NHL, hockey, or hockey at any level, we're sending it over to the penalty box. We're taking it off the ice. We don't think it's good for new money now, but we're not selling it. I tried to design a tool and a questionnaire that would help us internally decide when should we penalty box the stock, and when should we not. Alicia, you were alluding to what we use internally, which I've sometimes called the Bxometer, and some of the questions that we like to ask.

Alicia Alfiere: Box ofmtic I think I've also heard it called that.

David Gardner: Oh, my gosh, you're right. I'm rebranding my own creation. No, it is the Bxomatic. Alicia, what's question number 24 here for Etsy?

Alicia Alfiere: Can I just tell you? I think both words work. The next question. For the penalty box questions, I think that they're really helpful in analyzing a company, asking the questions to help you understand where the company is at now, which is especially helpful for these former pandemic darlings. The question that I have stolen from you again is, does this company have any identifiable, positive near-term catalyst? My answer here is, I'm not sure. Half a point. Certainly, economic uncertainty, tariff headwinds can be a catalyst in the wrong way. The company is also making investments in AI, using AI to improve things like estimated delivery dates and making seller items discoverable through Chat GBT. It's also creating tools for sellers, like listing title suggestions, writing assistance to help with communications with buyers. That's all interesting. But is it a catalyst? I'm just not sure.

David Gardner: I like the question a lot, and I think a half-point answer, which has become a theme of this particular episode of calculating risk foolishly. I like it is. I think you've innovated here, Alicia, four.

Alicia Alfiere: I'm sorry.

David Gardner: Let's give it a 0.5. Adding a half point, I believe that brings us to Etsy is now at 11.5. We're not quite done. Let's though, turn first to Yasser for his second-best question here about Duolingo.

Yasser El-Shimy: My second question for Duolingo is can Duolingo successfully expand into other verticals beyond language instruction? Can they be profitable and successful?

David Gardner: Great question.

Yasser El-Shimy: Like Alicia, I'm going to give a half a point here. I would say, Duolingo has already launched new verticals, including in mathematics and music, introducing a standardized English exam, for example; however, it's still early days. There's not enough evidence to suggest that these verticals have necessarily let the world on fire or been wildly successful or that are adding meaningfully to the company's bottom line. This is a case of wait and see.

David Gardner: I did reference it briefly earlier because I've definitely heard about it multiple times now. I haven't used it because I'm not a big chess player myself. I like a lot of other games, Yasser. But I would say there does seem to be some buzz around Duolingo chess, at least in the circles in which I move. Do you feel the same way or not?

Yasser El-Shimy: My 8-year-old just started learning chess on Duolingo, so I'll keep you posted.

David Gardner: It's interesting. Again, I really like the question that you're asking. While we can't with certainty answer yes or no to that one, the important thing is we're asking questions that matter. That's why we're saying, what is the best question? What's the second-best question you can ask?

Yasser El-Shimy: If I may add here, David, one of the questions that I always ask myself, and this is a case, because I almost always veer toward growth companies and growth stocks. That question is, what is the next S curve of growth going to come from? We know that they are doing this thing, whatever they're doing very well, but where is the next curve of growth going to come from? I love companies that are able to introduce new verticals and then grow on those verticals.

David Gardner: Go with the companies that can open up more and more options for themselves. I really appreciate that, as well. Well, let me mention a little bit briefly about Questions 23 and 24 and why we craft them this way. First of all, I think every company, every stock is unique. I don't think a single set of questions that unyieldingly repeats itself in every context is as valuable as a framework that has a little bit more flexibility, that opens up possibilities, and you can ask special questions in special situations. That's the purpose of numbers 23 and number 24. But also, having fun with this, it also lets you cheat. Here's what I mean by inviting Alicia and Yasser and you, dear listener, to craft a question of your own and then answer it. You may have noticed you can actually phrase the question in whatever way you want to obtain the yes or no that you may desire. The reason I designed it that way is because sometimes my professional analysts at the Fool get to this point, and they're like, wow, I'm just making this up. It's a 12. I actually think that's riskier than it really is. In that case, that person should, with the two questions, intentionally phrase them so they're answered yes. That way, the risk rating doesn't increase further. The opposite is also sometimes the case. You're like, wow, we're at a certain number six. I think the stock's riskier than that, though. In that case, the researcher would want to ask the questions in such a way that you answer no and plus it up 6-8. Very intentionally, it's allowing, in part, the questioner to guide the number a little higher or lower based on the nuanced context that they themselves have or bring. I realize not everybody even feels that confident or knowledgeable to know where they think the number should be. But as Alicia said earlier, we're learning pattern recognition with a framework like this. The more you use something like this, the more you can see the patterns that will help you recognize better where risk is and sometimes where risk isn't. That is the intention of custom questions number 1 and 2, which brings us now to the final question. Spoiler alert, we already know this one. But I'm going to turn to you first because you already know what the answer is, and so do our listeners, if they're listening, question number 25, but it is fun. Here it is. I'm going to ask it anyway. Alicia, this one's entitled Bulletproof. It is the final question we ask in our 25-point risk rating system. Alicia, can you be certain, in this case, that Etsy is invulnerable to external world or macroeconomic events, such that you're sure you can get all your capital back? Yes or no?

Alicia Alfiere: Absolutely not. Nothing is invulnerable. Not even Superman.

David Gardner: It does seem as if with technology speeding up, which I think is a fair generalization to make about this era, about our lives, and probably the world going forward, there are macroeconomic events. There are black swan moments. There are things that will happen globally and also just individually to companies or industries that we just couldn't have known. You can't be sure you're going to get all your capital back. Yes, as you already know, Alicia, I didn't want to design a system where people would say, risk rating was zero for that one. This ensures 21 and 25 that the minimum risk rating will always be two. I like that. Most risk ratings are higher than two. To have said yes to the other 23 questions is quite a remarkable situation. Yet, worth keeping an eye out for. Yasser, let me ask you about Duolingo. I know you're a bull. I know you're a share owner. I think you're smart. I hope you're right. This sucker's bouncing back, but we'll see. Yasser, can you be certain that Duolingo is invulnerable to external world or macroeconomic events, such that you're sure you can get all your capital back?

Yasser El-Shimy: Absolutely not. I mean, investing always carries risk with it. I would not describe any company with the adjective bulletproof. Things happen, and in this case, they could be disrupted by AI. There could be key insider risk. If, for any reason, the CEO steps down or leaves the company. There just could be any number of scenarios according to which Duolingo may not do well in the future.

David Gardner: Very true. True of Duolingo, true of Etsy, true of meta platforms, true of Netflix, true of IBM, true of whatever your favorite microcap crypto play is. True, Dad. Well, again, I want to thank Alicia Alfieri and Yasser El-Shimy. This will be one of our longer podcasts of the year, and it should be. We do this once every two years. We take you, dear listener, through two companies through 25 important questions in order to get to a better place than, yeah, it's a medium risk stock. I hope again, with the help of our friends, your understanding of Etsy, ticker symbol E-T-S-Y, and of Duolingo, Ticker symbol D-U-O-L. I hope we've contributed to your overall understanding of these companies, but more broadly, to think about risk as an investor in any company you're researching. You know, what we're really doing with this system is, I think, this was pointed out after our very first episode on risk ratings done in 2016 on this podcast. One of our listeners said, actually, I've been charting your risk ratings, and I think it's actually just scoring the quality of companies. He said, based on my early studies, a listener named Tom said to me, I actually think the lower rating companies generally do better as stocks. This is a little reward for those who've listened all the way through this podcast to us because I started off by saying, we're just looking at risk here. We're not saying that this or that number or stock is better than another, but I would also say part of my own learning has been that what looks like lower risk companies, and people say low risk, low return, high risk, high return, as a rule breaker, I disagree. Part of my learning is that you can find lower-risk companies with some of the highest returns available on the market. That is my rule breakery point at the end. Well, thanks again, Alicia. How about a final thought on Etsy?

Alicia Alfiere: I would say, Etsy, former pandemic darling, still a lot of questions around it.

David Gardner: Really well said, we asked at least 25 of them this week. Yasser, how about a final thought from you on Duolingo?

Yasser El-Shimy: Sure. With almost 1,400 days Trek Italian, I'm getting pretty tired of it, honestly. I want to start a poll. Maybe our listeners can send me nominations of which language I should learn next.

David Gardner: Excellent. Are you TMF Prof on Twitter?

Yasser El-Shimy: Yes, I am.

David Gardner: Excellent. At TMF Prof, I hope you get some suggestions as to which you should pursue next. My understanding, Yasser, were you studying all this before a trip to Italy?

Yasser El-Shimy: No. Actually, I wasn't was completely because I love the language. I watch Italian movies, I watch Italian soccer. Obviously love the food.

David Gardner: Just to be able to interpret a good Spaghetti Western, you just want.

Yasser El-Shimy: Exactly.

David Gardner: Good. Well, thank you again, Julsia and Yasser. To you, dear listener. Fool on.