Courtesy of Duolingo

The company intends to spend more on educational app technology, structure its product so it’s less focused on extracting payments, and pay more attention to boosting social media engagement.

13m

Duolingo plunged in early trading, putting the shares on track for their worst-ever day, after the company posted weaker-than-expected user growth in Wednesday’s Q3 results and simultaneously signaled that it was deprioritizing monetization over the short term in an effort to revive its growth numbers.

Given that “prioritizing monetization” is essentially Wall Street’s unofficial slogan, the stock market tumble is perhaps understandable.

But what does it actually mean? Basically, it means the decisions the company makes in structuring how the app works will be biased toward keeping new users on the app, rather then steering them to pay up to subscribe right now or monetizing their eyeballs through ads. (While those app roadblocks do pull in cash, they also increase the number of people who quit the app out of frustration.)

Why is the company doing this? CEO Luis von Ahn explained on the post-earnings conference call. (We’ve lightly edited it for clarity):

“We see a huge opportunity. Over the next few years, education and the way people learn, they’re going to change fundamentally, and it’s because of AI... We have line of sight now to create an app that can teach really, really well. Much better than anything that humanity has seen before, as good as a human tutor but also more engaging...

We just posted 135 million monthly active users. If we’re able to do an app that teaches much, much better than we have now, we will be talking about billions of users that we have. And that’s what we want to shoot for here. So, this is why we are investing in the long term...

The goal here is — because the opportunity is so large — the goal here is to be growing DAUs fast for a very long time.”

In a statement to Sherwood News, the company reiterated those points:

“The reason we’re taking the long view is because we see an opportunity to grow fast for a long period of time and make an app that can teach better than anything we’ve seen before. The financial impact from this reprioritization is relatively small and we believe it’s worth it in the near term because of the huge opportunity ahead.”

Reinvigorating user growth could be tough, however.

Duolingo intends to redouble its efforts on creating “unhinged” social media marketing content — which often features a stalker-like version of its ubiquitous green owl that’s fixated on getting you to do your language lessons.

Such content was key to the way the company built its user base over the last few years. But the company decided to take a break on it as it dealt with a separate social media backlash on LinkedIn — more below — as Von Ahn explained on the conference call.

“We paused all the unhinged posts in our social media for a bit because we were listening to our community and trying to build brand love. And when we don’t post unhinged things, that basically our posts were much less likely to go viral, and that did have an impact on [daily active user] growth.

The good news is that, over the last few weeks, we have started the unhinged posts again in our social media accounts. And while it hasn’t gotten all the way to the peak where it was, we’ve seen a lot of recovery. So, that’s really starting to show up. And we do expect that to affect [daily active users] positively.”

Judging from the reaction in the shares Thursday, people seem skeptical a stampede of users is on its way.

After all, the company said it was prioritizing user growth in the just-reported Q3, but user growth actually missed Wall Street expectations, arriving at 35.8%, lower than the 40% level Duolingo saw in Q2.

And Wyatt Swanson, an analyst who covers the stock for brokerage firm D.A. Davidson, told us that it’s far from assured that the company will be able to recapture the social media magic that previously made its unhinged posts viral sensations on TikTok and Instagram.

The company decided to pause such posts in the aftermath of a social media backlash to a clunky LinkedIn post laying out the company’s AI strategy. (It implied it would use AI to replace human contractors.)

Since that interruption in content, it seems like Duolingo’s owl is having trouble reclaiming a prominent place in the algorithms, which will make it much tougher to go viral and boost user growth, Swanson said.

“The setup really hasn’t improved that much,” he said of the company’s effort to refocus on growth. “The stock reflects that they’re just in a really weird spot.”

e.l.f Beauty plunges as tariff headwinds wreak havoc on Q2 results, full-year outlook

The same day that tariff-exposed stocks soared as traders judged that the Supreme Court was likely to rule against a large portion of President Trump’s tariffs, e.l.f. Beauty showed just how much these changes to cross-border commerce are crushing select businesses.

The beauty retailer reported disappointing Q2 results after the close on Wednesday, with both net sales and adjusted earnings per share well below estimates, and offered full-year guidance that was shy of the Street’s view on both of those metrics as well.

The stock is down roughly 34% in early trading, which would be a record loss if it fails to recover during today’s session.

On the conference call, Chief Financial Officer Mandy Fields laid out in stark terms just how onerous the operating environment is for the retailer:

“To set the foundation, about 75% of our global production today comes from China. Between April 9 and May 13, we were subject to tariffs at the 170% level. From May 14 through the end of October, product imports to the U.S. were subject to tariffs at the 55% level. As of November, we are now subject to a lower tariff at the 45% level given the recent reduction announced by the administration.”

Every 10% tariff increases e.l.f.’s cost of goods sold by $17 million on an annualized basis, per the company’s earnings presentation. The company delivered an across-the-board $1 increase in a bid to offset higher costs, but that wasn’t nearly enough to prevent gross margins from sinking by about 165 basis points compared to the same quarter a year ago.

Krispy Kreme jumps as traders applaud turnaround efforts

Krispy Kreme is leaning on some of America’s biggest retailers in a bid to make sure its doughnuts aren’t the only dough it’s making.

Josh Charlesworth, CEO of the glazed snack seller, told The Wall Street Journal the company is focusing on its distribution partnerships with the likes of Walmart, Target, and Costco — places with heavy foot traffic — as part of an optimization push to boost profitability.

On the company’s Q3 earnings call Thursday morning, management indicated that they’ve outsourced 54% of their US logistics and plan to outsource 100% next year.

Krispy Kreme might be known more for its belt-widening efforts, but it’s the belt-tightening moves that have traders enthusiastic on Thursday. The heavily shorted company is catching a bid as traders warm to these turnaround and cost-cutting efforts amid a mixed bag of Q3 results. Net revenues of $375.3 million were shy of the consensus estimate for $381 million, but the company did manage to book adjusted earnings per share of $0.01, while the Street had anticipated a loss of $0.07 per share.

And, as expected from this sporadic meme stock, call activity is running hot: a little more than half an hour into the session, call volumes of 7,555 have nearly eclipsed the stock’s five-day average of 7,957 for a full session. The three most active contracts are call options that expire this Friday with strike prices of $4, $5, and $4.50.

“CarMax is the nation’s largest used car retailer because we have built a business that customers trust,” said CarMax Board Chair Tom Folliard, who has been named the company’s interim CEO. “However, our recent results do not reflect that potential and change is needed.”

Folliard previously served as CarMax’s CEO for 10 years until Nash succeeded him.

The leadership change comes as CarMax rival Carvana closes its unit sales gap quarter by quarter. Despite selling more used vehicles, CarMax’s market cap is less than a tenth of Carvana’s.

“CarMax is the nation’s largest used car retailer because we have built a business that customers trust,” said CarMax Board Chair Tom Folliard, who has been named the company’s interim CEO. “However, our recent results do not reflect that potential and change is needed.”

Folliard previously served as CarMax’s CEO for 10 years until Nash succeeded him.

The leadership change comes as CarMax rival Carvana closes its unit sales gap quarter by quarter. Despite selling more used vehicles, CarMax’s market cap is less than a tenth of Carvana’s.

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