In a Rule Breaker Investing podcast, David Gardner introduces a 25-point risk rating system he’s used for over a decade to replace vague risk labels. Using Etsy and Duolingo as case studies, the trio scores each company question by question to assess quality and investor willingness to dig deeper.
Stock Advisor’s analyst team recently revealed the 10 best stocks to buy now, with Duolingo not making the cut. The top 10 stocks recommended could potentially yield huge returns in the future, similar to past recommendations like Netflix and Nvidia.
Gardner and Motley Fool analysts discuss the importance of understanding investment risk using a 25-point risk rating system. This system moves away from vague terms like “medium risk” and focuses on asking yes or no questions to assess individual stock and portfolio risk levels accurately. They challenge the belief that high risk always equals high reward.
Alicia Alfiere and Yasser El-Shimy join David Gardner to delve into the risk rating system and its application to individual stocks and portfolios. They highlight the importance of clarity in risk assessment and how lower risk stocks can sometimes offer greater returns, contrary to conventional beliefs. The system aims to provide investors with a more specific understanding of risk. Alicia Alfiere shares her best moment of 2026 – starting swim lessons with her 10-month-old daughter, the splashiest baby in class. Yasser El-Shimy talks about his family’s beach trip in January. Alicia and Yasser introduce Etsy and Duolingo, profitable in the past 12 months. Both companies are cash flow positive, with Etsy having $635 million in free cash flow. Etsy relies on its recognizable brand for unique items, while Duolingo’s green owl generates cash flow. Etsy and Duolingo are recognized e-commerce brands with strong market presence. Etsy boasts 93 million buyers and 8.5 million sellers, ensuring revenue diversification. Duolingo has over 50 million daily active users and 9.5 million paid subscribers, with revenue coming from subscriptions and advertising. Both companies have positive word of mouth and brand awareness, though Etsy’s net promoter score is -7. Etsy’s revenue growth has been lackluster, with single digit growth in recent years. Gross merchandise sales have declined, leading to a -1 net promoter score. Duolingo, on the other hand, has seen at least 40% annual revenue growth over the past three years, with a compound annual growth rate of 42%.
Etsy faces challenges with declining sales and reliance on seller fees for revenue. Duolingo’s rapid growth, while impressive, may pose risks due to high market expectations. Both companies have unique financial situations, with Etsy carrying more debt than cash and Duolingo maintaining profitability.
Etsy’s ability to operate independently is questionable due to its current debt levels and reliance on external funding. Duolingo, with its strong financial position and consistent growth, appears more self-sufficient. The companies’ financial health and growth trajectories will influence their long-term success in the market. Etsy’s buybacks have exceeded its cash generation, raising concerns about reinvestment in the business. Despite investor support, a $750 million repurchase plan adds to the nearly $1 billion spent on buybacks. Duolingo, on the other hand, is financially strong with over $1.1 billion in cash and generating significant cash flow.
Etsy’s disclosure practices meet SEC guidelines, maintaining transparency and communication with investors. Similarly, Duolingo’s high standard of disclosure includes detailed quarterly shareholder letters and an investor-friendly website. Both companies score well in this category, enhancing investor trust and understanding.
In terms of transparency, both Etsy and Duolingo make financial statements and management ownership disclosures easily accessible and understandable. Investor relations efforts, including investor presentations and clear explanations of non-GAAP measures, contribute to the transparency of both companies.
Etsy falls short in the “Well Managed” category, reporting negative shareholder equity due to large-scale buybacks, resulting in a return on equity below 15%. Conversely, Duolingo reported a return on equity close to 40%, indicating strong management and allocation of resources in the previous year. Duolingo’s third quarter saw a high return on equity due to a one-time tax benefit. Overall, ROE has been increasing over the past three years, indicating positive returns for investors. Financial statements offer insights into a company’s performance, including ROE, which reflects management’s ability to generate profits efficiently.
Etsy faces competition from e-commerce giants like Amazon and Shopify, making it an underdog in the market. Duolingo, on the other hand, is a top dog with strong brand awareness and user base. Despite being a smaller industry player, Duolingo surpasses competitors like Babbel and Rosetta Stone.
Etsy is vulnerable to competitors with greater financial resources, while Duolingo remains a market leader. Etsy faces alternatives like Folksy and Society6, but no major disruptors challenging its business model. Duolingo, however, has seen its stock price decline due to concerns about disruptive AI models in the language learning niche. Duolingo faces potential competition from AI challengers, according to David Gardner and Yasser El-Shimy. Etsy, on the other hand, does not have high barriers to entry, making it easier for new competitors to enter the market. Despite this, Etsy’s market cap remains below $10 billion, indicating potential for growth. Two market analysts discuss mid-cap stocks and why a $10 billion market cap is favored. Duolingo’s market cap is currently $7 billion. Etsy’s Beta is less than 1.3, while Duolingo’s Beta has been volatile, reaching above 2.5 at one point. Etsy’s P/E ratio is 39, considered high but not the worst seen. David Gardner emphasizes not fearing high P/E ratios as some successful stock picks had even higher ratios. In analyzing risk and stocks, a higher P/E ratio can increase stock risk. Duolingo has a P/E ratio of 19 for the last 12 months, but looking forward, it trades at 38 times next 12 months. Etsy insiders don’t have a 5% stake, while Duolingo’s co-founders own significant shares. Having key insiders with stakes shows commitment and interest in company success. Etsy’s top officers have over 15 years of combined service, reducing risk, while Duolingo’s CEO alone has 14.5 years of experience. Etsy leads with 8.5 points, while Duolingo has 5 points. Stay informed with the Data Over Dogma podcast, hosted by Bible scholar Dr. Dan McClellan and Dan Beecher. The podcast aims to provide trustworthy academic resources and combat misinformation about the Bible and religion in a fun way. Dan McClellan and Dan Beecher host the Data Over Dogma podcast, exploring topics from original source materials and interviewing top scholars. Whether you’re a believer or just curious about influential texts, this podcast offers a deep dive into the subject. Find it wherever you subscribe to podcasts.
David Gardner discusses questions 19 and 20 in his risk rating system, focusing on the Stock Advisor Way and conscious capitalism. Etsy receives a “no” for solid business, proven management, and a stalwart balance sheet, while Duolingo gets a resounding “yes” for its profitability and strong leadership.
Alicia Alfiere critiques Etsy for decreasing sales, new leadership, and high long-term debt, earning it a higher risk rating. Meanwhile, Duolingo impresses with its growth, profitability, and visionary leadership, securing a lower risk rating. Conscious capitalism is also considered for both companies, with Etsy receiving half credit for stakeholder interests. Yasser El-Shimy praises Duolingo for its mission of making education free and accessible to all. CEO Luis von Ahn emphasizes continuous value for users without charging upfront. The company’s conscious capitalism is evident in its employee-centric culture and refusal to move to Silicon Valley. Alicia and Yasser agree that no company can be fault-free or fraud-free, emphasizing the inherent risks in investing. David Gardner shares a personal anecdote about Krispy Kreme’s downfall due to fraud, highlighting the unpredictability of companies. They discuss the importance of personal interest in a company when assessing its risk level. Investors are encouraged to lower risk by studying investments thoroughly. Alicia finds Etsy intriguing due to its rise and fall post-pandemic. Yasser’s interest in Duolingo stems from being a user and satisfied customer. David emphasizes the importance of learning about companies to reduce investment risk. Custom questions about the purpose and defensibility of Etsy and Duolingo are posed and answered. Duolingo offers more than just language instruction, providing a unique social network-like experience. David Gardner believes in the company’s potential despite stock price fluctuations. Alicia Alfiere discusses the concept of the “penalty box” for stocks. She questions Etsy’s near-term catalysts and potential for growth beyond the pandemic. Yasser El-Shimy queries the expansion of Duolingo into other verticals and its profitability. Overall, the discussion highlights the complexities of investing and innovation in the tech industry. In a podcast discussion, David Gardner, Yasser El-Shimy, and Alicia Alfiere delve into the importance of asking the right questions when assessing investment opportunities. They emphasize the need to anticipate future growth curves and consider potential risks, even with companies like Duolingo and Etsy. No investment is entirely invulnerable to external events or disruptions, highlighting the importance of thorough risk assessment. In a recent podcast episode on risk ratings, it was noted that lower-rated companies may actually perform better as stocks. This challenges the belief that high risk equals high return. The discussion also touched on the potential for lower-risk companies to offer high returns in the market, providing a new perspective on investing strategies.
Alicia Alfiere suggests that Etsy, once a pandemic favorite, still faces uncertainties. Meanwhile, Yasser El-Shimy, tired of studying Italian on Duolingo, seeks suggestions for his next language challenge. David Gardner wraps up the podcast with a reminder to listeners to continue seeking new opportunities and learning experiences in the world of investing.
Read more at Nasdaq: Calculating Risk Foolishly, Vol. 4: ETSY vs. DUOL