Duolingo, Inc. (NASDAQ:DUOL) was the market’s favorite way of selling the idea that free AI tutoring makes a paid language app obsolete. For a while, the market bought it. The stock fell more than 50% over the past 52 weeks, erasing billions in market value from its peak. But something unexpected happened later. On August 18, 2026, DA Davidson upgraded Duolingo to Buy with a target lifted to $160. The shares jumped about 7%. But the tell isn’t the upgrade; it is the underlying user data.
The Turnaround Is in the Engagement Data
The “AI kills Duolingo” thesis is based on the belief that users would leave the platform. But the opposite happened. In the Q2 report on August 5, 2026, daily active users (DAU) grew 23% to 58.7 million. Alongside this acceleration, CEO Luis von Ahn said the DAU growth is likely to remain above 20% during the rest of the year. Paid subscribers rose 17% to 12.7 million. DA Davidson’s Wyatt Swanson flagged a June inflection that held through July and August on a higher base. If AI were replacing the app, user engagement would be the first metric to break. Instead, it is accelerating.
The Same AI Flipped From Threat to Tailwind
Rather than a substitute, AI is quickly becoming a margin and monetization lever. Shifts in AI workloads to open-source models brought a drop in the cost of Duolingo’s Video Call feature and lifted the gross margin to 72.6%. Lower AI costs are also allowing Duolingo to expand Video Call beyond Max to Super subscribers, potentially improving the value proposition of its paid tiers. These assists are turning the feared technology into a money-making feature. But key risks remain. The net income fell 26% year over year because of higher operating expenses, meaning profit recovery is not yet keeping pace with user engagement.
Heavily Shorted, and Institutions Are Split
Short interest sits near 20.72% of shares, reflecting heavy skepticism from institutional traders. And despite the recent upgrade of the stock, 19 of 27 analysts still rate it Hold. The institutional interest in Duolingo has risen modestly from 37 to 39 in the second quarter of 2026, according to the Insider Monkey database. On the other hand, despite the 67% decline, Duolingo is trading at approximately 21.6 times forward earnings.
Bottom Line
Duolingo, Inc.’s (NASDAQ:DUOL) engagement data is breaking the AI-casualty narrative. But it has still not removed the tension a short seller will press. The DAUs are growing 23% while bookings rise just 8%, so user activity is significantly outrunning revenue. Additionally, the full-year revenue growth of about 16% is down from nearly 40% a year ago. If the third-quarter DAUs fall below 20%, or if bookings stay stuck near 8%, it would weaken the thesis.
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