Duolingo Speaks the Language of Profit, But Gets Rocked by GPT-5
Shares of the language learning platform jumped as AI boosted profits, just to be slammed by OpenAI’s new model.
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A decade ago, I married a woman from Brazil. We had a child together.
Since my wife is Brazilian, and our child is part Brazilian, naturally we hired an au pair from Brazil. The au pair taught our child to speak Portuguese, the common language of Brazil.
Within a few years, everyone in the house — my wife, our kid, and our au pair — was speaking Portuguese.
Except for me. That’s when Duolingo DUOL entered my life.
AI-First Strategy Boosted Duolingo Profits
Much in the same way that Robinhood HOOD has gamified retail trading, Duolingo is gamifying language skills. Based in Pittsburgh, Duolingo is fun, easy to use, and affordable. In fact, Duolingo’s services can be accessed at no charge, if you’re willing to watch a few ads.
Earlier this year, Duolingo CEO Luis von Ahn announced a new "AI First" policy. This translated to integrating AI into Duolingo’s content creation, as well as replacing some contract workers with AI.
AI Giveth, and AI Taketh Away
As a result, Duolingo crushed earnings expectations and beat revenue estimates for its second quarter, which ended in June. Then the company raised its full-year revenue guidance.
Investment banker Morgan Stanley MS showed its appreciation for Duolingo’s quarter by raising its price target for the stock to $500, while maintaining an overweight rating.
In response, Duolingo shares soared 30% higher. Then, OpenAI dropped this video, and the stock reversed sharply.
Rally Torpedoed by GPT-5
The risks to Duolingo are numerous, and that lesson was driven home on Thursday afternoon.
Duolingo shares were up 30% on Thursday, after that stellar earnings report. Then the stock collapsed, losing most of its gains in a matter of minutes as OpenAI teased its new GPT-5 model.
One OpenAI official described GPT-5 as “Like having a team of PHDs in your pocket." Presumably, those PHDs are versed in foreign language skills.
Here’s how Duolingo shares reacted, shown on a 15-minute chart:
What’s the ideal price to pay for shares of Duolingo? I’d look for a close of Thursday's gap, which would bring the stock to just below $350.
Bottom Line
Duolingo’s reaction to GPT-5 seems a bit overdone. Will AI put an end to the relevance of services like Duolingo? That could happen eventually, but not in the foreseeable future.
There are still plenty of consumers who are happy to use a free app like Duolingo, and for this group, there is little incentive to change that habit.
At the time of publication, Ponsi was long HOOD.
