DD: Why I'm bearish on $DUOL's next earnings (As a Duolingo user)

tldr: bearish short-term as I'm worried about the conversion and retention rate of key revenue driver(GenAI paid subscription), optimistic on long-term growth, Duolingo is a great app.

DD:

$DUOL has seen tremendous growth since Dec 2022, about the same time ChatGPT was announced, stock has 4x since then. The platform also boasted a 40% jump in total revenues YoY, driven by growth in DAU/MAU and paid subscriptions. There’s no doubt that Duolingo’s recent financials paint a picture of strong momentum.

Duolingo's revenue mainly comes from 3 segments, which includes advertising, in-app purchases, and subscriptions. Yet, **approximately 80% of its revenue stems directly from paid subscriptions**. This means Duolingo’s top line is precariously reliant on convincing free users to make the leap to paid tiers, which is also the reason why the stock price has rocketed given the growth in paid users. However, I'm worried about the current valuation and the growing skepticism about Duolingo’s conversion rate of the premium subscription tier, **Duolingo Max**.

* **Mixed User Feedback**: Duolingo Max was highlighted in the Sep 2024 Duocon. It's basically a higher tier subscription with additional Gen AI features, where you get to practice speaking, and understand you mistakes more easily. However, the tier costs 29.99 USD / mo, and has received not so postive feedback. I personally tried it and the additonal features are just not worth the price tag. If you go to r/duolingo, and search about Max, there has been many complaints about the Max subscription and almost everybody just hates it.
* **Conversion and Retention Risks**: I've been in the Diamond League for 13 weeks in a row, where over 50% of the users in this league are long term users with 1 year+ streak, and every week I see on average less than 15% of users are actually in the Max tier.
* **Costly AI Investment**: Duolingo could possibily have a 70M expense on R&D this quarter, and the market has had high expectation on revenue boost from the Gen AI subscription. The Gen AI investments could eat into margins. Sustaining Adjusted EBITDA margin improvements could be challenging if AI development costs continue to rise without commensurate boosts in higher-tier subscription revenues.
* **One-Time Growth Drivers**: Recent price boost could due to the Tiktok ban where 'refugees' flooded into Rednote and started learning Mandarin, I gotta say Duolingo has a great marketing team and they have done a great job. However whether they could keep the users is questionable, per my experience Duolingo is unusable without subscribing to it... (I'm subbed to Duolingo Super btw)

To sum it up, I think Duolingo will see growth in users with subscriptions, but if they don't start improving the Gen AI experience with their premium tier subscription, the ROI will be VERY BAD in the coming quarters.

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