Hi Multis

I hope you can keep up with the pace. After two weeks of holidays, I’m full of energy to go through the earnings I missed while being in Sardinia. The good thing about not reacting directly after the earnings is that I don’t have any emotional reaction to the stock price, so it’s even easier to separate the business and the stock price. As you will probably know, Benjamin Graham famously said:

That means that the short-term price action is sentiment, over the long term, the business will follow the fundamentals. What many seem to forget is that in investing, even the short-term can feel and be very long. Benjamin Graham himself considered anything under three years as the short term and I think that’s still true today.

Duolingo (DUOL) reported Q2 2026 on August 5, after the close.

On Thursday, the stock fell about 15% but it has recovered most of the losses. Yesterday, it was even up, but today it’s down almost 8%.

This price action already shows what I said earlier. Had I written my analysis on the evening of the earnings and the next day, I’d probably be influenced negatively by the price action, or I might have wanted to prove too much that the market was wrong. Now, I don’t have that problem.

Let’s start with the numbers.

The Numbers

Revenue: $298.5M, +18% YoY (+17% constant currency), beating estimates by $2.9M or 1%.
Total bookings: $289.1M, +8% YoY (+6% constant currency)
Subscription bookings: $250.3M, +10% YoY
GAAP gross margin: 72.6%, quite a bit better than the 71% guidance.
Adjusted EBITDA: $77.3M, which results in a 25.9% EBITDA margin
Net income: $33.2M, down 26% but the difference is only taxes.
GAAP diluted EPS: $0.66, beating the consensus by $0.05
Free cash flow: $78.6M, a 26.3% margin

And then the most important for me at this point: the users.

DAUs (daily average users): 58.7M, +23% YoY, accelerating from 21% in Q1
MAUs (monthly average users): 140.6M, +10% YoY, accelerating from 6% in Q1.
Paid subscribers: 12.7M, +17% YoY

As always, Duolingo gives us a clear and visually attractive overview.

The adjusted EBITDA margin fell from 31.2% to 25.9%, but that was announced in February. Duolingo had guided for 25% and delivered 25.9%, so not bad at all, especially because management said they wanted to invest in new users and the number of users accelerated.

Important in this context is the DAU/MAU ratio, which went from 37.2% a year ago to 41.7%. Last quarter it was 41%. Some bears say that Duolingo has all the high-quality users already and now focuses on low-quality users. That argument is contradicted by the growing DAU/MAU ratio. Low-quality users would bring that number down.

This is the revenue mix.

Subscription revenue grows 22%, very much in line with the DAUs growth of 23%. For a company that said it would stop squeezing its free users, this is strong.

It also shows that you should own Duolingo only for its subscription revenue, not for the other revenue contributors.

Guidance and the Bonus Plan

These are the numbers for the Q3 guidance Duolingo gave:

$302M revenue (+11.1%)
$307M bookings (+8.9%)
Adjusted EBITDA of $76M at a 25.2% margin.

Revenue guidance was slightly below consensus and may have contributed to the initial drop, but it won’t be the main reason.

For the full year, there were no changes and that’s good news. That means 10-12% bookings growth and 15-18% revenue growth.

Keeping the full-year guidance while Q3 is slightly lower than expected implies the Q4 numbers have to accelerate. CFO Gilian Munson addressed this in the conference call:

We’ve always thought that acceleration is going to come over time. This is not a slow and steady. That’s not the way this place is. But we know that it’s going to take a little time for the work we’re doing to play through, and that’s what you see in terms of us holding which... the guidance, which implies Q4 gets better from a year-over-year rate of growth perspective.

And the incentive is there. CFO Gilian Munson talked about a bonus plan that pays roughly $10M in cash if Q4 DAU growth reaches 25% or higher:

While it is not included in our 2026 guidance, we do want you to know that the company has a bonus plan that will trigger if Q4 DAU growth is 25% or higher and would be paid out during Q1. Since it’s currently uncertain whether that threshold will be met, we have not included it in our 2026 guidance. If it were achieved, we would expect the payout to be roughly $10 million in cash, potentially higher if DAU growth is higher.

My idol Charlie Munger said: “Show me the incentive and I’ll show you the outcome.” Mostly that’s seen as negative, but it’s also very positive and I’m happy with this bonus plan that can act as a carrot for management and employees to reach the goal. Management said that it would focus on DAU growth and this bonus can definitely help.

Duolingo ships a new version of its app every week and each has about 350 changes compared to the last one. Management calls it The Green Machine. The team tests hundreds of things, measures, and keeps what works. It shows up in CURR. From the shareholder letter:

The main metric we use to evaluate the stickiness of our product is Current User Retention Rate (’CURR’), which is the proportion of “current user DAUs” who come back the next day. (...)
Because small improvements in CURR compound into large DAU gains, this is one of our most important leading indicators. Thanks to the Green Machine, our CURR is at an all-time high of 84%, up by about 1% from last year.

1% may not sound like much but at such a high CURR, any improvement is impressive.

Users Came Back

In June, Duolingo ran a one-time campaign that let users who lost their streak restore their longest streak by completing three lessons. From the letter:

The response was incredible: 15.4 million learners revived their streaks, including nearly 8 million users who had no active streak when the event began. This became one of our most successful campaigns. It shows how much the streak matters to our learners, as well as how large the opportunity is to bring former learners back to Duolingo.

Nearly 8 million people who had left Duolingo came back to do three lessons with just one campaign. That’s great. Trust me, the streak is very powerful (mine is 1,661 days now).

So the users came back. But the best news of this quarter is something else.

Below: what that is, the very ambitious target management has, how the CEO admitted he was “massively allergic” to something the company now applies, and whether the stock is a buy at $132, with my Quality Score and the Valuation.

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Duolingo: Users Came Back

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