Stock Story -
What Happened: Shares of language-learning app Duolingo (NASDAQ:DUOL) jumped 5.6% in the afternoon session after stocks rallied after the Fed slashed its policy rate by 50bps (0.5%) to 4.75%-5.00%. This marks the first rate cut since 2021, when the Federal Open Market Committee, led by Fed Chair Jerome Powell, began raising rates to tackle inflation. On delivering the outsized cut, the Fed acknowledged the improved conviction that inflation is moving sustainably toward its 2% target. To round out its focus on fulfilling its mandate, the committee highlighted the commitment to supporting maximum employment amid slowing job gains.
Markets reacted with optimism following the announcement. The Russell 2000 index rose by 2%, suggesting the rebound is broader than just large tech and more pronounced in small-cap stocks. The major indices (Dow Jones, S&P 500) also touched new records, though there's been a slight pullback. This could be some combination of the markets having already priced in the rate cut and also some emerging concerns that the large cut is a sign that the Fed thinks the economy may be teetering. Overall, the announcement has provided a breath of fresh air and a clearer view of the Fed's monetary policy stance, which the market has been waiting for with bated breath.
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What is the market telling us: Duolingo’s shares are quite volatile and over the last year have had 26 moves greater than 5%. In context of that, today’s move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The biggest move we wrote about over the last year was 7 months ago, when the stock gained 23.3% on the news that the company reported fourth-quarter results and delivered robust user and revenue growth, leading to a nice beat on bookings. DAU growth accelerated for the 10th quarter in a row to 65% year on year in Q4, while the ratio of DAUs to MAUs improved to 30%, which highlights that engagement is improving. The top line also benefitted from strengths in the company's family plan offering and better-than-expected performance in New Year promotions.
Bottom line metrics also came in strong, with adjusted EBITDA, free cash flow, and EPS exceeding expectations, demonstrating the company's ability to balance growth and profitability. Lastly, guidance for the next quarter and the full year were ahead of expectations for both revenue and adjusted EBITDA. Zooming out, this was a great quarter that shareholders will appreciate.
Duolingo is up 18.3% since the beginning of the year, and at $253.52 per share, has set a new 52-week high. Investors who bought $1,000 worth of Duolingo’s shares at the IPO in July 2021 would now be looking at an investment worth $1,824.
