2 Falling Knives That Might Be Worth Catching

The Trade Desk (TTD) and Duolingo (DUOL) have shed close to half their value this summer, presenting a 'falling knife' scenario for investors. TTD's decline of over 50% since early August, following Q2 earnings concerns over slowing growth, has led to downgrades from firms like Morgan Stanley, despite its extremely oversold RSI of 26 and Needham's reiterated Buy rating with an 80% upside target. Similarly, Duolingo, down by half since June amid fears of slowing engagement and AI competition, has seen upgrades from KeyCorp and Zacks, with its RSI around 40 suggesting it's less oversold. Both stocks exhibit a mixed analyst outlook, highlighting a debate over their potential for recovery versus continued downside.

Analysis

The Trade Desk (TTD) and Duolingo (DUOL) present classic 'falling knife' scenarios, having both declined by approximately 50% over the summer, creating a stark contrast between their prior status as investor darlings and current market positioning. TTD's sell-off of over 50% was specifically triggered by its Q2 earnings report in early August, which fueled concerns about slowing growth and prompted bearish analyst actions, including a downgrade from Morgan Stanley questioning the sustainability of its premium multiple. This sharp decline has pushed the stock into an extremely oversold technical condition, with a Relative Strength Index (RSI) of just 26, and it is now testing a critical support level at $45. A contrarian bull case is maintained by Needham, which reiterated a Buy rating with an $80 price target, suggesting a potential 80% upside. Duolingo has faced a similar price collapse since June, driven by market fears of slowing user engagement and emerging AI-powered competition. However, the analyst sentiment for DUOL appears more constructive, evidenced by recent upgrades to Overweight by KeyCorp and Strong Buy by Zacks. Technically, DUOL's RSI of around 40 indicates it is no longer in oversold territory and may be attempting to stabilize, having recently established a definitive low near $265 before rallying over 20%.

Key Decisions for Investors

• For The Trade Desk (TTD), risk-tolerant investors could consider a tactical long position given the extremely oversold RSI of 26 and its test of the critical $45 support level, though a breach of this level would signal further downside risk.
• For Duolingo (DUOL), which appears to be technically stabilizing with an RSI of 40 and has recent bullish analyst upgrades, investors might consider the $265 level a key support for initiating a position, reflecting a potentially more favorable risk/reward profile than TTD.
• Both stocks are high-beta, speculative investments due to their recent precipitous declines and the conflicting analyst ratings, warranting cautious position sizing for any investor attempting to 'catch the falling knife'.