Duolingo (DUOL +2.93%) is a contrarian pick for investors seeking a shot at 10x returns. A 70% drop over the past year and a 36% year-to-date drop don't sound inspiring, but it's this type of pessimism that can spark a huge rally when Duolingo reports earnings on Feb. 26.
This stock traded above $500 per share last year, and while some investors rightfully argued that it was overvalued at that level, the drop to roughly $100 per share is overdone at this point. These are some of the reasons why Duolingo stock looks undervalued and can produce a 10x return.
Understanding the fear of an AI takeover
Duolingo is a language learning app. If you want to learn Spanish, you can use Duolingo's gamified app to come across new vocabulary and practice your dialogue. Duolingo offers this experience for other languages and has expanded to other subjects like math and chess.
NASDAQ: DUOL
Key Data Points
However, investors are nervous that AI advancements will make Duolingo obsolete. T-Mobile (TMUS +1.19%) recently introduced a feature that automatically translates what someone else says on the phone if they are speaking another language.
AI models like ChatGPT and Grok can also be programmed to offer language quizzes and teach you about your target language. The bearish thesis driving substantial stock losses is that people will learn languages with other apps and resources instead of Duolingo, and that AI makes it even easier to opt out of Duolingo.
Image source: Getty Images.
AI isn't a new threat
These threats would be more valid if AI had just come out and was still a novel concept, but that simply isn't the case. ChatGPT launched in November 2022 and reached 100 million monthly active users in January 2023. Grok came out in 2023, along with other AI models.
People who had the opportunity to leave Duolingo for ChatGPT, Grok, and other alternatives probably would have done so by now. It's been more than three years, and Duolingo has continued to grow each of those years.
The educational tech company now has more than 50 million daily active users, which helped the company deliver 41% year-over-year revenue growth in Q3.
Duolingo's language learning isn't even driving most of the growth anymore. Chess is the fastest-growing subject on Duolingo's platform.
To top it off, people still feel comfortable paying Duolingo for subscriptions. Its total paid subscribers increased by 34% year over year, reaching 11.5 million in Q3.
Duolingo's 70% crash is entirely fueled by investors worrying that AI will make Duolingo obsolete, but the company's financial results suggest that the opposite is happening. Duolingo looks poised to deliver solid results that will establish it as a promising growth stock, and I predict investors will suddenly rush toward this contrarian pick once it picks up enough momentum.
