Welcome everyone today on the Joseph Carlson show Duolingo.
The stock that's on everyone's mind.
It's down a staggering 29% on the day.
The stock price is being obliterated.
And why is that? Well, the stock is obviously
being re rated because investors are now concerned about its
future deceleration in growth. Now anytime a highly rated
stock, one that's trading at a higher multiple, has any
concerns with its growth, investors sell out of the stock.
They rate it much lower. And that's what we're seeing
happen here. So this is clearly a rerating
event and this is something that I have a little bit of
experience with. In the past with Netflix, that
was another stock that concerned investors for a time and
investors quickly re rated the stock to a much lower multiple,
causing it to fall 75% from the highs.
So given this situation with Duolingo, what do we do?
Do we sell out of the position? Do we accept our losses, do some
tax loss harvesting and move on? Do we hold the position?
Do we buy more and double down? There's a number of options
available to investors in these situations and what investors do
in these specific scenarios, in these exact situations where
stock like Duolingo sells off dramatically, what we do now
can, in many cases, determine your future returns to a huge
extent. So we'll be talking about
Duolingo and I'll be going over some of the fundamentals of the
business as well as commentary from the management.
Management held an earnings call yesterday that I will admit was
one of my favourite earnings calls ever.
It was incredible to listen to the vision of this management
and I want to go ahead and highlight some of the things
that the CEO said on this call. So we'll be looking at
everything. We'll be looking at the
portfolio, the position sizing, all of the damage being done by
Duolingo. We'll go over all of it.
Now, of course, we have other news to get to.
Google is on the move again. It's one of the rare stocks
that, at least right now, is in the green.
On this red day, Google is by far my largest position.
It's one that I'm very proud to have as my largest position
because like I've said many times, I've never seen so many
good things going on with a single stock.
It's incredible. And this is just one more thing
to add to the list. Google is now rolling out its
most powerful AI chip, taking aim at NVIDIA with custom
silicon. This company is doing it all.
It's just doing it all. We're going to be looking at
Google's advancements. And then finally, we've already
had a fail of the week this week, but we have a second one.
So that's two fails of the week. And in this case, it's going to
be Chipotle. Chipotle is struggling.
Unit volume is going down. Customers are frustrated.
One of the primary reasons is the inconsistent portion sizes.
Sometimes you get a big burrito, sometimes you get a small
burrito. You never know.
It feels like a gamble going to Chipotle.
And in this episode I will be fixing Chipotle.
I have the solution, I have the answer.
I can fix this company and get it back on track.
We'll be going over that fix. So we have a ton to get to in
this episode, a lot to go over. We're going to be jumping into
all of it. Just a quick mention before we
jump in. I have launched Qualtrim Direct,
meaning that you no longer need to go to Patreon to sign up for
Qualtrim and join the Joseph Carlson Show Discord community.
Now this is a great value because you get both
qualtrim.com full access to it, the entire website, all the
benefits, all the bells and whistles for 10 bucks a month.
And you also get the Joseph Carlson Show Discord included
with that. So there's no upsells, there's
no cross selling, it's all just one thing and you can sign up
directly on qualtrum.com without ever using Patreon.
Now there's two different plans. One of them is $10 a month.
You get a free trial, a 7 day free trial.
The other one, if you really love the service, you can pay
$8.25 a month on average billed once a year.
So this is the annual plan. Either way you pay, it's dirt
cheap. We now have above 11,000 users.
In the past week alone, we've had 800 people sign.
Up so I appreciate everyone for trying it out and the reviews
have been. Overwhelming, I mean it's just,
it's awesome to hear people's great experiences with the
product saying this is amazing. I've I've tried it out.
It's exactly what I've been looking for.
We're getting a lot of that. So I appreciate everybody and
hope you have a good experience with it.
Now let's go ahead and jump in. The first thing I want to
mention with Duolingo is we can look at my position sizing
because this isn't just some stock.
This is one that's in My Portfolio now.
It's in the story fund and here we have it.
If we look at the story fund, this is a little bit more of a
an aggressive portfolio, so to speak.
In general, these stocks are more volatile, they're more
aggressive, they're faster growing.
And you'll also notice a theme that they're almost always
subscription based companies or their data companies.
They offer products that people use for a very long period of
time. So they're not very
transactional companies. These aren't ones that you have
an experience with once and then you leave.
So they're not like car companies.
These are companies where you live with the product, you use
it all the time. It becomes part of your daily
routine. Think about the fact that Amazon
is a product that is a part of my life.
I, I have immense lifetime value with Amazon, Netflix as well.
I think I'm going to have a membership for the rest of my
life. Same with Google.
I use their products every single day, all day, all the
time. Microsoft, the same thing.
Then we have S&P Global. This one is a a bit different
because it's more detached, but it is ingrained and embedded in
all of the markets. But then we have more of this
with Duolingo. This is another stock that
despite the volatility, despite the fact that the stock price is
all over the place, this is a company that people use all the
time. 50 million people are using this every single day, 50
million a day and even more on a monthly basis.
Now the thing that I want to highlight with Duolingo before
we even get into the analysis of what's going on and what I plan
on doing is I want to emphasize one point and that is position
size. Duolingo has always been a small
sized position and the reasons for that were intentional.
I intentionally put it as a smaller position because I
recognize the inherent risk and volatility in the company.
It is a small company, meaning that it has higher levels of
volatility. Smaller levels of capital move
the stock more, either up or down.
That increases the amount of volatility, which in many cases
increases the amount of risk because when stocks go up 50% or
down 50%, it can become much more difficult to hang on to
that company. So volatility was part of the
reason that I kept it as a smaller position.
Another reason why is because the company is less established
in many other positions. For example, no one can
reasonably argue that Duolingo has a much more proven Moat and
proven business model than Google, Netflix, or Amazon.
You just can't. Google, Amazon and Netflix are
just way more proven stocks. They're more at a steady state.
They're more mature now. Netflix 10 years ago, then you
could argue that they're on par with each other.
Netflix 10 years ago was a bit more dicey.
It was a bit more risky, so to speak, but that's where Duolingo
is now. It's earlier in its arc.
The probabilities, the outcome distribution is wider than these
other companies. Now, having said that, I've
taken in all of these risk factors and I assessed that this
stock needed to be a smaller position and I sized it as a 2%
position. Let's go ahead and just take a
look at how this looks on Qualtrm.
I can look at my passive income portfolio and the story fund
where I can look at them combined.
So let's go ahead and just take a look at them combined for a
minute. We have here at the top Google.
Google is a 13% position. A lot of that is growth.
Google stock has grown to $72,000 in gains, not counting
dividends paid. And then the rest of it is
deposits I've deposited into Google.
I've purchased myself over $100,000 of Google stock.
So an enormous amount of money has been spent on Google at all
varying stock prices because I'm so bullish on this company.
But Google's also grown with 72,000, so it's roughly a
$172,000 position. Now.
We also have Amazon 11%, S&P Global 9% or 10%, Netflix 10%,
and all these companies have made massive gains.
Then we Scroll down the list. We have all these holdings, 6%,
eight percent, 5%, four percent, 3% for Equifax.
Even Texas Roadhouse, which I sold off half my position is a
3.2% position right now. Duolingo is less than a 1%
position now. That's partly because it's sold
off by half the position. It's down $11,000.
Before this company sold off, it was a 2% position.
So when from 2% it's down 50%, now it's at a 1% position,
meaning the total impact on My Portfolio, the NAV of My
Portfolio was deemed by 1% because of Duolingo's
underperformance. Now I'll admit, having a 1% hit
to My Portfolio is not fun. I want every single stock I make
to be a successful one. I try hard to make good
investments, so it's not good. I'm not celebrating that the
stock is down 50% and that it's a 1% hit to My Portfolio.
But the reason that I bring this up is because it's important to
look at position sizing. A lot of times when we look at
other people's investments, we just see a list of holdings.
But looking at how much money they have in every holding is
incredibly important. For example, the total amount
that I've put in the Duolingo myself is $20,000.
That's what I've contributed. So the most that I can lose on
the stock is around $20,000. Now with Google, I've
contributed five times that amount.
So it's a $100,000 contribution to Google.
So Google's over five times the size of my contribution to
Duolingo, and that represents my levels of conviction in these
stocks. Now, that shouldn't be
interpreted as me being bearish on Duolingo, but I just believe
that it's deserving of a smaller amount of capital.
I think that's prudent investing.
And I've highlighted this before today.
This is something that again, I've been saying for months.
Three months ago I said it's fair to say that a much smaller
market cap, higher volatility, A thesis more heavily dependent on
continual high growth rates, and only a partially proven durable
Moat are all factors in the smaller size position for
Duolingo compared to other more established companies.
That's what I wrote on my Discord a couple months ago when
I was continually asked about why the stock is such a small
position in My Portfolio. So I've had experience with
stocks dropping. In fact, I've seen rerating
events like this happened before first hand.
One time with Netflix years ago, I had Netflix as my top
position. Netflix was a stock that I was
so bullish on. I couldn't even contain my my
excitement about the company. I made video after video about
the stock. You can go back and look at this
very channel. Look at around 2020-2021, 2022.
That's where you'll see a lot of content about Netflix.
Netflix ran into troubles with future expected growth.
They said that they're not only not growing with subscribers,
they're actually churning. They're going to lose some
subscribers. They're going to lose about a
million subscribers. Wall Street didn't like that the
stock price valuation was rated and dependent on continued fast
future growth. When Netflix indicated to
investors that growth is going to be upset, that growth is
going to be much slower than expected, that they may not even
have a total addressable market to grow into, investors became
incredibly bearish on the company incredibly fast.
And in many cases, this can catch you off guard.
It did with me. I didn't know that Netflix is
going to sell off 75%. After all, I had it as my
largest position. So Netflix begin to sell off
quarter after quarter, 2 consecutive quarters and it sold
down 75% from the highs. My top position was completely
obliterated. Now that was really stressful.
That was not a fun thing to have happen.
And ever since then, I've been careful when I invest in
companies that are dependent on continued high growth rates,
ones that have a lesser established and more volatile
story. In that case, Netflix was my
biggest position. So that was a pretty tragic
event for My Portfolio. In this case, Duolingo is my
smallest position. It is not a tragic event.
This isn't something that's really going to impact the
portfolio performance over the long term.
It is so far a 1% Ding to the portfolio now.
In any case, I don't like it when my stocks go down.
I want all my investments to do well, including Duolingo,
including even my small positions.
I put the $20,000 into this stock because I want to make
money with it. So let's go ahead and just take
a look at the situation that we're in.
The stock is is being re rated. It's down 30% and these type of
sell offs happen for specific reasons.
They happen because investors have determined that this
company no longer deserves the premium multiple that it once
traded at. So they re rate it down to a
lower rating. The most common reason why is
because this company is dependent on high growth.
Investors have outlined an underwritten high amounts of
growth, revenue growth of the company.
And so far Duolingo has delivered on that revenue
growth. You can see the very fast
revenue growth. They're growing 41% it it
continued growing in the future, but Duolingo gave investors a
reason to be concerned that growth may be decelerating, and
that was in their earnings. Report, in their earnings
report, they go over everything, but I want to skip to the 2025
outlook and beyond. When we look at the 2025
outlook, they have something here called bookings, the Q4
bookings, so next quarter to grow 22% year over year or 19%
on a constant currency basis at the midpoint.
Now why is this important? It's important because Wall
Street believe that they're going to grow their bookings at
around 24%, which is more than what they said they're going to
grow. So Wall Street's saying, oh wow,
not only did they not meet their booking estimates or exceed it,
but they didn't even come close. They're they're below what we
expected them to grow. And so we see a company that's
growing slower than expected. Now what is the booking growth?
The booking growth is like the amount of subscribers and the
amount of revenue they're gaining that's amortized over a
year. So way to think of this is right
now the revenue that Duolingo's receiving this quarter is
bookings they got last year, meaning that the bookings they
get this year is going to be the revenue they receive next year.
So bookings are a preview of the future.
And the preview of the future shows revenue slowing down when
a company's price. At a premium multiple and
revenue slows down further than expected you get stock prices re
rated. So that is the single reason the
stock is down today. It is that booking number.
Now if we look at other. Things, I think there's actually
a lot of positives in this report and I want to go over a
handful of them here. If we look at the overall
subscription revenue of the company, it is growing
incredibly fast. In fact, the subscription
revenue grew by 45%. Subscription revenue makes up
around 90% of their total revenue because they are a
subscription based company. What I see here with this most
recent quarter is incredible economics.
You have a company that is growing the subscription base
over time. These users are also falling in
love with the product, using it every single day, and we see
that in the other numbers. For example, we have the monthly
active users. This is a big scary point just a
1/4 ago. Remember, a big problem with
Duolingo 1/4 ago was that their monthly active users actually
declined. It declined?
Oh no, everybody was concerned about the monthly active users
going down. Will it ever grow again?
Was this because AI is eating away at Duolingo's mode?
Was this because Google Translate is now stealing
customers? Will this quarter prove that
wrong? It continued to grow even past
where it was in Q1. The growth of the monthly active
users is up 20% year over year and now they have 135 million
monthly active users. So I'm personally very happy to
see this continuation of this trend.
I thought that it would continue back upwards, but there was no
guarantee. There was a chance that the
monthly active users could come in below where it was last
quarter, that it could continue on its decline.
And we don't see that. So that's good news for the
Duolingo shareholder. Then we have the daily active
users. These are people that log on and
do a lesson every single day, every day of the month, the
entire quarter. We have it right here.
It's now past 50 million daily active users.
We look at this and it went from 47.7 to 50.5.
Now this level of engagement having 50 + 1,000,000 daily
active users surpasses many top social media companies.
A lot of them do not have 50 + 1,000,000 daily active users.
So I like seeing this growth as well.
We see the paid subscribers. The paid subscribers also grew
by 34% year over year. Now they have 11.5 million,
that's a bump up from 10.9 million the quarter before.
We see continued growth, all the charts going up into the right.
So that's what we see with Duolingo, all of these.
Charts are moving in the right direction.
One thing that didn't move as much as investors may have
expected is the paid subscription penetration, but
that is for specific reasons. The management noted that
they're not focusing on that right now.
And this is part of the concern of this quarter.
Management basically said that their main focus has shifted.
It's shifted away from turning the screws of monetization and
making more revenue to now going for a big opportunity.
And the CEO highlighted over and over again the opportunity that
they're going for. I want to play some clips of the
audio just from this most previous earnings call of Lewis,
the CEO of the company, talking about the opportunity he sees
ahead with education. Yeah.
I mean, look, we're like, like you said and like I said in the
shareholder letter, there's there's a huge opportunity right
now. We see a huge opportunity over
the next few years. Education and the way people
learn are they're going to change fundamentally.
And, and it's because of AI and also because of AI, we see 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, as a human tutor, but that is also more
engaging. And if we're able to do that,
you know, right now we have, I don't know, we just posted 135
million monthly active users. If we're able to do an app that
teaches just that well, way, much, much better than we have
now, we would 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, we are investing in the long term.
And, and what that look like, looks like is that we are
putting relative, more relative investment in things like
teaching better, which, you know, teaching better.
If we teach better, what that does is that that helps user
growth, but there's a lag, you know, just whenever you improve
your courses, users do grow, but it takes a while for that to
happen. And then user growth, there's a
lag to get to monetization because people take some time to
subscribe. So this is kind of a long term
thing, but we're, we're, we're, we're very bullish on this and
This is why we're, we're, we're doing that.
Talks about how they're in the low 100 million users and his
ambitions are to get to billions of users.
And he mentions this opportunity again throughout the call
multiple times. I want to highlight one more
time where he talks about this. As to why now this, I mean it's
a great question. The reality is that over the
last couple of years, it has just become progressively clear
and clear that we are in a unique point in time,
particularly with education in terms of how education is going
to happen in the world and also how well we can teach a dual
single. We just see it in our own
metrics in how fast we can put out content with things like
video call. Do we just see how much it is
improving every month. And so that just kind of has
been coming for a while. And what has happened is that
over the last month or two, I've really rallied the company
towards this, this shift. The CEO has come to the
conclusion that we're at a very unique moment in time where the
landscape of education is shifting dramatically.
He has this big opportunity to grow into this category of
making Duolingo the go to biggest platform in the world
for education. And they're trying to direct the
company more in that direction, focus on getting more users,
making them more engaged, focus on expanding the content slate
and better teaching. He highlights Teaching better
multiple times throughout this call.
They're putting a little bit less emphasis on converting
users from the free account to the paid account, making it so
that they can price things a little bit higher.
That's not going to be something that they never do, but it's
just less of their company's resources and intent and focus.
So that is the the gear change. That's the opportunity that this
company sees. And when you look at this, you
can take it two ways. Many people on Wall Street will
say, well, that just means that we're going to get less
bookings, less subscriptions over the next year, which means
revenue won't be as high over the next year because they make
money through those bookings. But that's not the only thing
he's saying. He's saying part of this is a
deliberate choice. If Duolingo wanted to, they
could make bookings go through the roof.
They could make it grow by 50% next quarter.
They really could if they wanted to, but that would be at the
long term detriment of the company.
And he explains how they literally have these mechanisms
to determine how much they convert or how much they don't
convert users from the free tears to the paid tears.
They determine that they can do it through all their AB testing.
He highlights very specific examples.
Some experiments improve all metrics.
Great, that's an easy call. Just launch it because it
improves all metrics and that happens.
But there are times when experiments improve one metric
but hurt another. I'll give you a a a fictitious
example. If right now a free user, free
users get 25 energy units at the beginning of the day and every
exercise that they do spends 1 unit.
If we were to do an experiment that decreases that from 25 to
say 24, that's one fewer unit of, of, of energy per day.
We know that would make us more money that it just does because
more people run out of energy. So more people end up, you know,
wanting to pay to subscribe. So he has a mechanism right
there that he knows would up their revenue.
He could just turn it on at any point.
Just make it so that the energy units are 24 per day instead of
25, and they'd convert far more people to the paid terror
because they'd be frustrated with running out of energy.
So why doesn't Duolingo just do that?
Why don't they bump up revenue and give Wall Street exactly
what it wants, more bookings? Well, he explains exactly why
they're not doing that in this next part.
However, we also know that would decrease daily active users
because it would frustrate some of the users we've always had to
make decisions about, you know, different judgement calls about
this. What we mean is that what we the
change that we are doing is that we are going to be prioritizing
user growth over monetization in this type of of judgement call.
So in the fictitious experiment that I just gave you, we would
not launch that experiment going from 25 to 24 energy units even
if it meant, you know, quite a bit of bookings gains if it has
a real hit on daily active users.
So Duolingo has these hundreds of experiments they're running
all the time, testing their product on learning outcomes and
behaviors and engagement, their user retention and churn, all
these different things that they're constantly tuning and
turning. And what they're saying is with
all of these tests, they're now focusing primarily on user
growth and user retention. They're not focusing quite as
much on conversion or revenue. When you put this in the greater
context of the direction of the company, this is a very
intentional choice, a focus on organic growth and big
opportunities ahead. We're later on down the road.
Once you've gotten the opportunity, once you've really
won, then you can turn the screws of monetization.
That's exactly what Uber did. At first, Uber was focused on
growth and they're highly unprofitable business.
But Uber grew and grew and grew to scale.
They seized the opportunity ahead of them and now they're
highly profitable now that they've met scale.
It was the same thing with Netflix.
Netflix ran free cash flow negative so long the analysts,
many of them were convinced they could never turn a dime of
profit. Even smart analysts, great ones
like Aswat Damodoran said Netflix is just a a broken
business model. That's what it does.
When a company focuses on scale and opportunity over immediate
monetization, it can in many cases trick investors and
analysts, and I believe that's what's going on right now.
Duolingo, by the metrics, is a globally dominant company.
You look at any of the metrics and it is growing like crazy.
They have 11 and a half million subscribers.
These people are loving this product.
They're using it every single day.
They're growing quarter after quarter, despite all the people
saying that they would not continue growing, that their
daily active users would go down.
Their monthly active users would decline because of artificial
intelligence, because of ChatGPT, because of Google
Translate, because of the Apple Airpods with live translation.
People said the company would die.
They said that the usage would go down.
They said the churn rate would go up.
All user engagement metrics and numbers and usage are all going
up. And in terms of the Moat of the
company, many people are again concerned about AI learning and
AI translation. This has been one of the top
concerns that I've heard about Duolingo since the very
beginning, and in this call, the CEO addresses this concern head
on. Here's what he says.
The two things that people say about the competitive landscape
with AI are #1 why would anybody want to learn a language with
Duolingo? And you can just learn it with
ChatGPT, OK. I, you know, we're not
particularly worried about that. You know, the, we've said it
before, the main thing that that we do really well, not only do
we teach well, but the main thing that we do really well is
keep people engaged. And in order to learn a
language, you need to be engaged for years.
Really takes years to learn a language coming every day.
And we need to keep you engaged actually doing it.
And not only that, we also need to have curriculum for years for
you to do that. So, you know, with ChatGPT, you
can go there and you can ask it to teach you a few words here
and there, but you know, it's not like you can have really
curriculum for years that that, that teach that.
So we're not particularly worried about that aspect.
And then the other thing that people, you know, have said that
they're worried about is, oh, well, nobody's going to want to
learn a language because, you know, the, we're going to have
simultaneous language translation and OK, also not
worried about that. You know, I, I believe in 100%
of the Google IO conferences over the last 10 years, they
have showcased simultaneous language translation.
They do it every single year and it's good, it works.
But this has been happening for the last 10 years and we have
not seen the decide to learn a language go down at all.
In fact, it has come up. And I think the biggest reason
for that is because if you look at our users, they fall into two
big categories. One big bucket is people who are
learning a language as a hobby. It kind of doesn't matter
whether a computer can do that because they're the same with
chess. By the way, computers are way
better than humans with chess. But still, you know, we have
millions of people wanting to learn chess.
That's so it doesn't matter if it's a hobby.
The other big group of people that are learning a language
with us are people who are learning English and they
actually want to learn English Like that is, you know, for
them, you know, being able to have like a phone that they have
to hold out. It just kind of that's not what
they what they want to do. So we just, we're not
particularly worried about the that it just so happens that
people like to tweet about that. We're not worried about it.
He highlights the distinction between Duolingo and a ChatGPT.
Although you can practice the language on ChatGPT, continuing
to be motivated for years on end every single day is what
Duolingo specializes in, and these other companies have not
done nearly the user behavior testing to have that level of
engagement. The next thing is a live
translation, which he accurately says is not a motivation for
people to learn languages. People don't learn languages
because of a lack of live translation, especially many
people that are learning languages for job opportunities
or for cultural reasons or for hobbies.
Just like learning chess where there's computers better than
you at chess, learning a language in many cases is a
hobby for people. And I agree with this
assessment. I think it's an honest
assessment of the differences between Duolingo and just some
AI learning app. Now Lewis goes on in this call,
outlining all the different things that they're doing for
the future, improving their teaching, adding more courses,
making it more engaging, making it so that they're adding more
content to existing courses so they can teach.
Languages to a higher level and so on and so forth.
In the chess course, for example, they're making it so
that you can now have player versus player.
Half of iOS users have that. They say that chess is in the
millions of users already. It has retention rates better
than their language learning. So they are growing a new pass
with higher levels of activity. But overall, the big thing that
I want to highlight with Duolingo and I think the the
most important thing is I noticed something with this
company in particular and that is an investors do what
investors end up doing for every situation like this, which I
think is a mistake. They let the stock price
movement inform them of their opinion on the stock, meaning
they don't look at the fundamentals, they don't look at
the the growth pass in the future, revenue expectations or
anything like that. They don't look at the
valuations. They simply look at a stock
price going up or going down and they say that is what my opinion
is. If the stock went down, there
must have been a reason why Wall Street is pricing at lower.
That means that the stock is doing poorly.
That's what I see a lot on Twitter, on YouTube comments all
across X. I see people letting the stock
price inform them of their opinion on the stock.
For example. I believe in an alternate world,
if you had this result and the stock price for whatever.
Reason went up 10%, but nothing changed, not the bookings, not
the growth rate, none of these metrics.
I believe that most investors would look at this company and
say this was a great quarter. The stock should probably be up
a little bit and look, Wall Street is pricing it up.
So it must have been a great quarter.
That's the influence, the impression that the stock price
leaves on you. And I think that this is a
dangerous way to invest. After all, if you let the stock
price dictate your impressions of a company, if you let the
movements and the volatility tell you how to feel about a
company, then you would not have bought Netflix when it fell 75%.
You would have sold out because the panic.
It really looked bad according to the stock price, even though
at the time we can look at the real damage that happened to
Netflix. Let's go and take a look at how
bad things really were when the stock price dropped 75%.
We have Netflix here, we have total subscribers.
The stock price dropped 75% right there.
That was it because this quarter, right there was
slightly less than that 175% decrease in stock price, total
obliteration, all because of those two quarters.
Now, Wall Street said that Netflix was basically worth
nothing because the stock was never going to grow again.
They didn't listen to the management, they didn't listen
to the password crackdown narrative.
They didn't listen to any of the the long term thesis or thought
process behind what the company's actually doing.
What Wall Street thought was that this company was highly
rated because of fast growth. The company is now not growing
as fast, so the stock needs to come down.
That's the mechanics of the market.
But if you let the market inform you on how to feel about a
company, you'd miss out on Netflix.
And there's plenty more examples where this came from.
In 2022, Amazon was trading at $80.
Per share right there, $86 per share now Amazon trades.
At $240 per share, so $80.00 to 240.
What happened in 2022? Well, of course it was because
they're investing in CapEx for their retail growth and that was
expensive and it caused the free cash flow to go down a lot.
Investors in Wall Street looked at that and they said, Oh no,
we're not going to make as much money over the next year.
We need to abandon the stock. Investors that looked at this as
an opportunity of a company investing in its long term
future that's prioritizing lifetime value of customers and
expansion over short term profits made immense gains in
that stock. I bought Amazon very close to
$80 per share. I bought it under $100 per share
over and over again. And that's the reason why that's
such a big winner in the portfolio is because I didn't
let them market dictate my thoughts on the company.
And again, these examples can go on and on.
There's so many stocks that drop down for short term reasons that
if you let the stock price dictate how you feel about the
company, you're going to be misled and you could potentially
miss out on huge gains. And on this point, I want to
highlight a story from Jeff Bezos.
This is when Amazon stock price crashed by around 90%.
Amazon's stock in a very short period of time went from $113 a
share to $6 a share was very concerning and shareholders were
upset. Employees were nervous.
We had all of our employee base, their parents were all calling
our employees and saying are you OK?
You know, this was the environment of great
nervousness. But I looked at the numbers in
the business and every month as the stock price went from 113 to
6, the a number of customers went up every month, our gross
profits went up every month, our operating expense, we were still
in a loss position, but our our losses as a percentage of sales
went down every month. Every single business metric,
new customers, customer repeat purchases, everything that we
were monitoring through that entire period kept getting
better. And so this that's one
observation about bubbles in general, the fundamentals can be
disconnected, the fundamentals of the business.
And of course, as entrepreneurs, you're focused on the
fundamentals of the business, the stock prices and output and
ultimate output. Did you actually have very
little control over Benjamin Graham?
The great investor is famous for saying in the short term, stock
market is a voting machine. In the long term, it's a
weighing machine. And so as founders and
entrepreneurs and business people, our job is to build a
heavy company. We want to build a company that
when it is weighed, it is a very heavy company.
The goal for entrepreneurs like Lewis, the CEO and founder of
Duolingo, is to forget about the stock price.
You don't have any control over that, and that's the long term
output of what you do have control over, which is the
fundamentals making a heavy company.
Now, I'm not suggesting that Duolingo's the next Amazon, I
don't believe that. I'm not suggesting it.
But I do believe there's an opportunity here where Duolingo
could still turn out to be a pretty heavy company, one that
has a massive amount of users, a really well liked company in a
very relevant industry. We've seen these type of similar
companies play out, these large platform companies with hundreds
of millions of users that end up growing to large established
companies that in the end become very heavy companies.
We've seen it with Spotify. That was a company that many
people are worried about the music labels and look how
wonderful of an investment that's turned out.
We've seen it with Netflix, we've seen it with DoorDash,
we've seen it with Uber. All of these companies were
money losing. All of them have very volatile
histories. All of them have time periods
where investors are super bullish or super bearish on the
company. And overtime, what matters is
the weight of the company. Is Duolingo going to become a
heavy company? Will it become a big, large,
established, profitable company or not?
If you don't believe it will, then don't buy the stock.
If you believe it might or there's a good chance of it,
then it might be worth biting at.
It might be worth 1 to consider. And in any case, I'd never
recommend making it your entire portfolio.
I'm not doing that here. If Duolingo doesn't work out,
it'll be a bummer, but it's not going to impact my portfolio's
performance to a massive degree. But I still believe there's a
good chance for upside because like Jeff Bezos says, I'm
looking at the fundamentals. I'm seeing the metrics go up and
to the right for Duolingo. As long as I see that happen,
I'm not going to sell this stock.
And in fact, I'm a dollar cost average and buy a bit more.
Now let's go to move on to some news.
Now, amongst this big sell off, there are a few companies that
are at least holding up right now.
Google's one of them. It's sticking in the green, just
barely teetering in the green, despite the fact that the rest
of the market is selling off heavily.
And the QQQ, the mega caps, are selling off even more.
Why is Google doing so well? Because Google has even more
good news. The company said on Tuesday that
the 7th generation of its tensor processing unit, the TPU is
called Ironwood, will hit the market for public use in the
coming weeks after it was initially introduced in April
for testing and deployment. The chip built in house is
designed to handle everything from training of large models to
powering real time chat bots and AI agents and connecting up to
9216 chips in a single pod. Google says the new Ironwood TPU
eliminates quote data bottlenecks for the most
demanding models and gives customers the ability to run and
scale the largest, most data intensive models in existence.
Now if I was blindfolded and I just heard this line, I would
think this has to come from NVIDIA at the very least.
It might come from AMD. They they might say something
like that, but that's not coming from NVIDIA or AMD.
Now it's Google. Google is also good.
They're they're not just good at YouTube, they're not good at
robotaxi. They're not just good at cloud
hosting. Now they're good at making
chips, really powerful ones that in their words can run the most
data intensive models in existence.
How did Google get this chip so good?
How did they get it so it matches performance and
efficiency of top tier chips? Well, like many things that
Google does, they've been working on it for a long time.
They've just been investors in all these projects for decades.
The TP use have been in works for a decade.
Ironwood, according to Google, is more than four times faster
than its predecessor. The AI startup Anthropic plans
to use up to 1,000,000 of the new Tpus to run its clod model.
If the market wasn't having a big panic attack today and
selling off 2%, Google would be up two to 3% on this news.
There's no doubt about it. Now, moving on, we get to our
fail of the week. This is the second fail of the
week. So we're going to have a maybe.
We're going to have a fail of the week on a daily basis, a
daily fail of the week. Don't ask me how that makes
sense, but that's what this has turned into.
In this case, it's Chipotle. Now, Chipotle stock is down a
lot. That in and of itself is not the
fail of the week. Many stocks go down for all
different reasons, but Chipotle is down around 50% on the year.
And it's not just the stock price.
The company's also struggling, for example, even though
Chipotle's opening up more locations and they're seeing
some growth that way, the average revenue per location is
declining and it's been declining quarter after quarter.
One of the major problems with Chipotle is very clear.
Anyone that has gone there frequently knows about this
issue. It is the fact that going to
Chipotle to some degree is a bit of a gamble.
You don't really know what you're going to get.
It's very inconsistent, and this is an anecdote from my
experience, but it's also one that's shared amongst millions
of people. We look at viral tweets like
this. This is from Mike from Chipotle
Tweets. He's tweeted that he actually
did kind of like a a little bit of a sting operation on
Chipotle. He said that I ordered these
burritos 15 minutes apart from the same store today.
The one on the left I ordered in person and it's twice the size
as the one on the right which was ordered online.
My order online is always significantly smaller every
time. Stop ripping us off.
Off to the. Left we can clearly see the
burrito is almost twice as big as the one on the right.
The one on the right is like a normal sized burrito.
The one on the left is gigantic. And again, this is not just Mike
when he tweeted this. Everybody said the same thing.
This has 10 million views, 144,000 hearts, 7000 retweets.
This is one of the most viral tweets.
Across Twitter is people saying I know this experience.
I've also gone and ordered online and I get ripped off.
Now we can only speculate why the digital ordering and online
ordering has such smaller portion sizes than in person,
but if I had to guess, I believe it's because when you go in
person. The employee feels more pressure
to kind of deliver a good burrito.
They see you right there looking at what they're doing.
So they at least see some human connection when it's just
digitally. They go in the back kitchen,
they prepare something. They don't even have to see you.
They never see you through the drive through really.
So there's not that human connection.
Now, the previous CEO of Chipotle noticed that this is a
problem. He even suggested going in
person. And then if you get a smaller
portion size than what you believe you should have, if it's
a kind of a smaller portion size and what you want, you give the
employee the nod. You give them a nod to get the
portion size you deserve. Here he is talking about that.
One of these, I think it's great about Chipotle's.
If you come into the restaurant and you want a little more rice
or you want a little more people, all you got to do is
kind of like, and usually our guys and women give them a
little more scoop. Now, I don't know about you and
you may think I'm crazy here, but I don't believe that the
customer should be the one responsible for making sure
their burrito is made with the proportions that they're paying
for. I think if you just ask for
something, if you say I want a burrito with chicken, then it
should come with the right amount of chicken.
You shouldn't have to give them a nod to say, hey, I really want
the the full amount that I'm paying for.
I don't think that should be the case and it seems like I'm again
not the only one that feels this way.
There are massive amounts of posts on this subject with 10s
of thousands of people, hundreds of comments all saying the same
thing, that this company has a problem with inconsistent
portions. Chipotle has even been sued for
inconsistent portion sizes. The inconsistent portion sizes
of Chipotle's food is such a big deal that one Wells Fargo
analyst took it upon himself to do an in depth study on the
subject. He ordered 100 burritos from all
different locations at all different times.
He had the exact same order every single time.
The bowl weight varied widely. The lightest bowl was 3 standard
deviations below the median. Meaning that this is not just an
anecdotal experience, this is a mathematical certainty.
Chipotle has wildly varying portion sizes with the food that
they give to their customers. Management of Chipotle don't
seem to know how to solve this problem.
They've tried to tell their employees, hey, do better, they
tried to train them better, but so far they don't have an
answer. And Chipotle has taken to
blaming the economy and their most recent earnings, saying our
third quarter performance fell short of our expectations due to
persistent macroeconomic pressures.
And that certainly is a factor, I'll admit, that it plays into
any restaurant. But there's also a big factor
that you do have control over. Even though the CEO does not
have control over the economy, they do have control over how
they run their restaurant. And they could get rid of this
frustration that many customers deal with.
And luckily for the Chipotle management, I have the answer.
I have the solution. This is a a really easy problem
to solve and I'm going to lay out the answer today.
This will change Chipotle for the better.
When we see this implemented, you're going to have a better
product because your product will be completely consistent
every single time. We can take the example of a
restaurant called Mobetus. It's a Hawaiian style
restaurant. It's a really good 1.
I actually love this place. So if you've ever, if you've
ever been around on Mobetus, go try it out.
If you haven't, I think you'll like it.
We have a guy here, He's doing a food review like Chipotle.
This is a restaurant where you have all the pictures of the
food, you have all these different orders, and you go up
in A and you go up and you assemble your food in the line.
So we get to where they prepare the food.
Again, you go down the line, they prepare it exactly like
Chipotle's. But there is one notable
difference, one thing that is just different than what
Chipotle does that makes it so at this restaurant, you get
perfectly consistent portions of the protein every single time
you go in. Let's look at exhibit one.
We have it right here. I'll outline it in red right
there. We have exhibit one.
That is a scale. That's a food scale.
What Movedas does is they take your plate of food before they
put any protein in it. They put it on the scale.
They hit a button that zeroes out the scale, then they put
food on to where you have the amount of food in weight.
That is the amount you're paying for.
So as a. Customer, you see them pick up
the food, put it in the plate on the scale, and then they have a
nice little margin, right? It has to be very close, but
they have a nice little margin of the amount of food you paid
for. It doesn't take hardly any
additional time. In fact, it takes probably about
two to three seconds longer. But that two to three seconds
longer ensures that you get the correct proportion of food.
All Chipotle needs to do is add the scales.
That's it. They add the scales and they
figure out one massive problem for the business.
Food scales are cheap, they're easy to implement, they're easy
to train. It fixes a massive complaint for
the company. It doesn't cost the company much
in CapEx, and their throughput or the rate that they can get
people through the line really isn't slowed down that much.
Maybe 3 to 4 seconds to ensure you get a better experience.
So even though this is the fail of the week, it's also ending on
a positive note. I'm glad together we could fix
Chipotle, we could make it a better company, and overall, we
can make that unit volume grow again because if you know what
you're getting, you're going to go there more often.
That's going to be it for this episode.
Hope you enjoyed. See you in the next one.