2 Falling Knives That Might Be Worth Catching
With the major indices continuing to set fresh records, it can be tough for investors to feel comfortable buying into names already trading at highs. However, at the other end of the spectrum, it can be just as tough to buy into a stock that has been sinking like a stone—or, as Wall Street likes to say, to catch a falling knife.
Currently, two stocks firmly in that camp are The Trade Desk Inc. (NASDAQ: TTD) and Duolingo Inc. (NASDAQ: DUOL), which have shed close to half their value this summer.
Both have been investor darlings in recent years, with Duolingo’s AI–powered expansion driving excitement in ed-tech. At the same time, The Trade Desk’s programmatic advertising platform looked well-positioned to keep making gains in the digital advertising space.
But after months of selling pressure, both now carry the “falling knife” label. That begs the question: are these stocks worth catching, or should investors continue to run away?
The Trade Desk’s Painful Collapse
The Trade Desk had been rallying solidly through the summer, but its Q2 earnings report at the start of August raised all sorts of red flags and flipped the script. Shares have since fallen more than 50%, closing Monday right around the $45 mark. Having once been one of the brightest stars in ad tech, The Trade Desk is suddenly on the ropes.
Last month’s report caused widespread concern about slowing growth, which precipitated a wave of bearish analyst updates. These have continued into September, with the team at Morgan Stanley downgrading the stock just last week. In their note to clients, they flagged “mounting concerns” about whether the company can sustain the growth rates that justified its premium multiple.
Wall Street Not Entirely Bearish Despite Oversold Signals
However, technically, at least, things appear to have reached an extreme, and this is where it gets interesting. The Trade Desk’s relative strength index (RSI) is just 26, suggesting the stock is extremely oversold.
The key level to watch now is $45, where the selling stopped during the depths of April’s sell-off, and right around where the stock is right now. If The Trade Desk can also hold that level this time, there’s scope for a similar recovery bounce.
It’s important to note that not everyone on Wall Street has turned cold on The Trade Desk. The team at Needham actually reiterated their Buy rating on the stock earlier this month and held firm on an $80 price target. From where shares closed Monday night, that implies a targeted upside of almost 80%—an opportunity that might be too good to turn down.
Duolingo’s Nasty Slide
While in a completely different industry, Duolingo has had no easier time. Since early June, the stock has been cut in half, erasing nearly all the gains it had logged over the previous 12 months.
Much of the selling has been driven by fears that engagement growth is slowing and that AI-powered rivals could soon be eating into Duolingo’s dominance in language learning.
But some analysts aren’t buying into that bear case. Last month, KeyCorp pushed back and upgraded Duolingo to an Overweight rating while giving the stock a $460 price target. The team there was impressed by the stock's new risk/reward profile and believes Duolingo has several key growth drivers still in play.
The Contrarian View on Duolingo Stock
This bullish outlook was echoed by Zacks Research just last week when they upped their rating on DUO stock to a Strong Buy. When comparing it against The Trade Desk, a key difference is on the technical side of things, with Duolingo’s RSI sitting around 40, compared to the former’s 26. This suggests that Duolingo is no longer technically oversold and might be settling here.
However, it’s hard to ignore the definitive low that the stock set last week, from which it subsequently rallied more than 20%. While yesterday’s session saw it give up some of those gains, the bears might quickly run out of steam if that $265 level can continue to hold in the coming weeks.
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