Duolingo (DUOL) is considered a "dirt cheap" buying opportunity as the market overestimates the threat of AI to its language-learning business. The company's fundamentals remain strong, with daily active users and paid subscribers growing rapidly despite the stock's decline. A key upcoming catalyst is the Q4 earnings report, which could present a prime buying opportunity. Consider initiating a position in DUOL if the company reports strong results but the stock price reacts negatively. For a less volatile opportunity, ServiceNow (NOW) has also entered an attractive valuation zone for investors seeking stable, large-cap growth.

ServiceNow (NOW)

• The speaker believes ServiceNow has been unfairly sold off and is now entering a "buyable territory".
• The market narrative causing the sell-off is the belief that AI will make ServiceNow's workflow automation software obsolete, as users will just "vibe code" their own solutions.
• The speaker's proprietary valuation metric, EV over GP over RG, has fallen from 1.08 a year ago to approximately 0.5, which is his threshold for a "buyable" stock.
• Despite the negative narrative, the company's fundamentals remain strong:
  • Revenue is still projected to grow 20% over the next 12 months.
  • The business is highly resilient due to long-term contracts and high switching costs, making customers effectively "hostages".
  • It has $28 billion in Remaining Performance Obligations (RPO), indicating a large backlog of future contracted revenue.
  • The subscription renewal rate is extremely high at 98%.
  • The company achieves a Rule of 40 score of 56, indicating a healthy balance of growth and profitability.
  • It is growing much faster than traditional ERP competitors like Salesforce (CRM) and SAP.

Takeaways

• ServiceNow presents a potential opportunity for investors who believe the current AI narrative is overblown and that the company's core business is more durable than the market suggests.
• The stock is considered a high-quality "Wall Street darling" that has become significantly cheaper, though not "dirt cheap" compared to other beaten-down growth stocks.
• The speaker is not personally buying NOW at this moment, as he sees better deals elsewhere in the market. However, he clearly flags it as having entered an attractive valuation zone for those interested in more stable, large-cap growth companies.

Duolingo (DUOL)

• The speaker describes Duolingo as being in the "dirt cheap category" after a massive stock price decline, despite the business itself "firing on all cylinders".
• The stock has been a "roller coaster," but the underlying business growth is strong:
  • Daily active users grew from 20 million to 50 million in just over two years.
  • Paid subscribers grew from 4.8 million to 11.5 million in the same period.
• The stock's decline is attributed to a powerful market narrative that AI will make language learning obsolete through:
  • 1. AI Tutors: People using tools like ChatGPT to learn languages.
  • 2. AI Translation: Real-time translation features making it unnecessary to learn other languages.
• The speaker strongly disagrees with this narrative, arguing that people learn languages for fun, travel, and personal interest, a desire that AI doesn't replace.
• The speaker's valuation metric, EV over GP over RG, is at 0.18, which he considers exceptionally low for a former market darling.
• The company also has significant, unpriced future growth opportunities ("0 to 1 moves"):
  • Disrupting K-12 education with subjects like math and history, especially in emerging markets.
  • Expanding the Duolingo English Test (DET) to disrupt the expensive and established English proficiency test market (e.g., TOEFL).

Takeaways

• Duolingo could be a significant buying opportunity if you believe the negative AI narrative is wrong and that the company's strong user growth will continue.
• The investment thesis is a contrarian play against the current market sentiment. The stock is cheap because the market is pricing in a high risk of disruption from AI.
• The speaker's game plan: He is waiting for the Q4 earnings report. If the results are strong but the stock price reacts negatively, he would consider it a prime opportunity to buy.
• Risk/Opportunity Cost: The speaker notes that many growth stocks are cheap right now (e.g., HIMSS (HIMS)), so investors must be selective. However, DUOL is highlighted as being particularly cheap given its strong performance.