Duolingo Faces User Backlash in US Over 'AI-First' Strategy, Morgan Stanley Says

MT Newswires Live
08 Jul

Duolingo's (DUOL) internal "AI-First" memo led to user pushback in the US, contributing to a 10% decline in domestic daily active users since April, Morgan Stanley said in a note Tuesday.

The backlash, tied to concerns over reduced reliance on contractors for content creation, appears to have impacted only US users, with international user trends holding steady, the firm said.

Morgan Stanley outlined three possible outcomes from here: a temporary pullback, diminished social media virality, or a more persistent decline in brand resonance. The firm sees the first two as more likely and believes the negative sentiment is already showing signs of easing.

Indicators like stabilized US DAUs since mid-June, recovering TikTok views, and a return to normalized app reviews point toward a possible recovery. Duolingo's history of successful product iteration and strong engagement metrics support the view that the brand remains resilient.

Still, Morgan Stanley lowered its Q2 estimates to 40% year-over-year DAU growth and 30% bookings growth, reflecting recent alternative data and user softness. It also reduced its 2025 and 2026 DAU and bookings estimates by 2% to 5%.

While the brokerage sees the user headwinds likely weighing on second-quarter results, it warned against over-extrapolating short-term data, especially during a seasonally soft period. Favorable foreign exchange movements could provide a partial offset, according to the note.

Morgan Stanley cut its price target on Duolingo to $480 from $515, maintaining an overweight rating.

Price: 379.24, Change: -17.22, Percent Change: -4.34

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