The Market Called Duolingo an AI Casualty. Its Users Just Said Otherwise

Duolingo, a popular free AI tutoring language app, faced the market's belief that its free AI feature would lead to users abandoning the platform. However, recent data contradicts this notion. In the second quarter of 2026, Duolingo's daily active users (DAU) surged by 23% to 58.7 million, with CEO Luis von Ahn predicting this growth to continue above 20% throughout the year.

Simultaneously, paid subscribers increased by 17% to 12.7 million. Analysts from DA Davidson upgraded Duolingo to a Buy rating with a target of $160, causing the stock to jump approximately 7%. The growth in DAU and paid subscribers suggests that AI is not a threat but rather a valuable tool for Duolingo's monetization. The company's lower AI costs, resulting from shifts to open-source models, have increased its gross margin to 72.6%, allowing for the expansion of AI-powered features like Video Call to more subscription tiers.

Despite a 26% year-over-year drop in net income due to higher operating expenses, Duolingo's stock is trading at around 21.6 times forward earnings. However, the company still faces challenges, such as a short interest near 20.72% of shares and some analysts maintaining a Hold rating. The discrepancy between user engagement and revenue growth, with DAUs accelerating while bookings only rose 8%, remains a point of concern for some investors.

While Duolingo's user engagement data is challenging the AI-casualty narrative, it has not entirely dispelled the skepticism from short sellers. The company's revenue growth, at around 16% for the year, lags behind its user growth.