What Happened:

Shares of language-learning app Duolingo (NASDAQ:DUOL) fell 19.9% in the morning session after the company reported first-quarter earnings results and provided revenue guidance for the next quarter below Wall Street's expectations, though it upgraded its full-year revenue and EBITDA outlook, topping projections. 

On the other hand, Duolingo delivered exceptional revenue growth this quarter, driven by more paid subscriber additions than expected. Its EPS also blew past analysts' estimates. Zooming out, this was a mixed quarter, with the market likely worried by the weak guidance.

The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Duolingo? Access our full analysis report here, it's free.

What is the market telling us:

Duolingo's shares are somewhat volatile and over the last year have had 27 moves greater than 5%. But moves this big are very rare even for Duolingo and that is indicating to us that this news had a significant impact on the market's perception of the business. 

The previous big move we wrote about was 21 days ago, when the company gained 8.5% after the S&P Dow Jones Indices announced that the company would join the S&P MidCap 400 index before the start of trading on Monday, April 22, 2024. Being included in the index means that Duolingo will likely be held by many mutual funds and ETFs, which could potentially drive up demand for the stock. We note that while buying of the stock could increase, this development does not change the fundamentals of the company. Revenue growth, expense efficiency, and capital intensity of the business, for instance, are not impacted by index inclusion or exclusion, so this is more of a technical tailwind for the stock.

Duolingo is down 5.2% since the beginning of the year, and at $203.23 per share it is trading 18.3% below its 52-week high of $248.84 from May 2024. Investors who bought $1,000 worth of Duolingo's shares at the IPO in July 2021 would now be looking at an investment worth $1,462.

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