Backlash to Duolingo’s AI memo will hit Q2 numbers: Morgan Stanley

Live by social media buzz, die by social media backlash.

In the last hour of trading, Duolingo was on its way to a 3% loss for the day, after Morgan Stanley analysts trimmed Q2 estimates for the online language-learning app, which until recently had showed remarkable agility by building its brand through its slightly unhinged social media content.

Then came the company’s decision to publish on LinkedIn a memo outlining its plan to becoming an “AI-first” company.

It was the kind of corporate thought leadership that pervades the executive-friendly networking platform. But readers and users clearly took exception to one section of the memo, where CEO Luis von Ahn said the transition would mean the company will gradually stop using contractors for work that AI could do. It didn’t go well, according to Business Insider:

“The backlash was harsh. Tweets, TikToks, and Reddit posts exploded in outrage. Duolingo has cultivated a big social presence with its meme-loving owl mascot, so the company was a prime target. One TikTok creator implored their fans not to allow Duolingo to return from being canceled.”

There also seemed to be a business impact. Analysts at Jefferies recently suggested that a decline in the growth rate of daily active users (DAUs) may have been linked to the kerfuffle. On Tuesday, Morgan Stanley analysts concurred, noting other evidence since the ill-fated LinkedIn post:

“Since then, we have seen a decline in US users albeit with no impact internationally. This can be shown through a variety of datapoints, Sensor Tower shows US DAUs declined ~5% in the following 2 weeks & another ~5% since, international DAUs have been unaffected ( Exhibit 1 ). Second, the number of people learning a language in English on DUOL has declined ~1% while people learning English has increased ~3% ( Exhibit 2 ). Third, the average views on DUOL’s TikTok videos in June were down ~55% versus April showing reduced virality ( Exhibit 3 ). With the US user weakness occurring after the company gave guidance, we expect DUOL’s DAUs will come in below prior expectations and now model 40% y/y DAU growth, the low-end of guidance.”

Morgan Stanley cut their price target for the stock to $480 from $515, which still implies a roughly 25% upside over the next 12 to 18 months. And the bank’s analysts think that, like most social media phenomena, anti-Duolingo sentiment will prove ephemeral.

“User backlash to tech companies has historically been shortlived. We see some evidence this is following a similar path: US 1-star reviews normalized in June to <5% of the total after spiking in May ( Exhibit 4 ), US DAUs have stabilized since mid-June, and the company has seen views trend upwards on recent TikToks.”

Morgan Stanley maintained its “overweight” (essentially “buy”) rating on the stock, saying “nothing fundamentally alters our bullish thesis.”