Duolingo, Palantir emerging amongst market leaders but don’t write off Magnificent Seven or Musk - Omba’s Sean Ashton

As Trump's tariffs continue to disrupt global markets and the AI revolution reshapes the investment landscape, market leadership is shifting - and there are surprises emerging among them. One of them is the language app Duolingo, which has quietly outperformed some of the biggest names in tech with a 58.1% return, even pipping Palantir Technologies at 55.1%.  In an interview with BizNews, Sean Ashton of Omba Investments delves beneath the surface of index and sector returns and reveals Duolingo's value lies in its strength in leveraging AI within its business model to accelerate content creation, with new offerings potentially including chess, mathematics, and even music. However, both Duolingo and Palantir remain highly valued, with Palantir described by Ashton as 'probably the poster child for extreme valuations in today's market.' Among the other standout performers, cybersecurity giant CrowdStrike has posted an impressive 37.3% YTD return. And where do the Magnificent Seven stand? With Alphabet, NVIDIA, Microsoft, and other dominant tech players, Ashton argues that despite passing on the baton, “if you delve below the surface of indices and even sector returns, it is far from over in tech land. As for Tesla, Ashton points out that the Cybertruck hasn't hit its stride, auto margins have collapsed, and Musk's entanglement in US government affairs has triggered a backlash. But Musk should not be written off. "He's come back from worse many times before.

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Edited transcript of the interview:

Linda van Tilburg (00:00.753)

I'm Linda van Tilburg for BizNews and we're joined in the studio today by Sean Ashton from Omba Investments. He's a seasoned stock picker with a sharp eye for market trends. 

2025 has been anything but predictable. Trump's tariffs have stoked global markets, creating volatility across sectors, and the AI revolution continues to reshape the investment landscape. So, where does this leave us?

Sean Ashton (00:36.942)

I think what's quite interesting, as we noted in the piece that we put out recently, is that if you were not invested in the Magnificent Seven grouping of stocks, so that's Alphabet, Nvidia, Microsoft, a handful of large other ones, in 2024, you pretty much would have been left behind and nothing much else that you did would have mattered much. But we’ve seen a subtle or not-so-subtle shift in 2025, where markets have become more selective.

And that's a natural evolution of this bull cycle that we're in at the moment, where you're moving from the initial phase, the infrastructure build-out phase of AI with investment in silicon, to the software beneficiaries of that investment phase. And so market leadership is just changing. It doesn't mean that the boom is over.

Linda van Tilburg (01:31:441)

So, what are the stocks to watch in this new landscape? 

Sean Ashton (01:48.974)

So, I think what's quite interesting to note is that when you look at the Magnificent Seven grouping of stocks this year, and this is up until, call it the 9th of May when we pen the report, that grouping of stocks was down, 13 % in a market that was down 3%. Those were obviously the big winners from 2024. And so, the many market participants conclusion might well be, the AI boom is over. 

But we've noted a handful of software leaders that have come through very strongly this year. Palantir is one to watch. It's up north of 50 % this year: Duolingo, and another in the cyber security space. You've got companies like CrowdStrike that are up north of 20%. So, there are many examples of software-centric businesses that employ AI in their business models that have done incredibly well here to date.

Many of them have very high valuations, but that's often quite typical of early leaders. The market's very forward-looking, and they're traded at very, very high multiples, and ultimately, you then expect the earnings delivery to come through and backfill those valuations. But expectations are high,

Linda van Tilburg (03:09.349)

So Duolingo, isn't that surprising? It's a language app, so won't AI up end their business model?

Sean Ashton (03:15.574)

It's an interesting one. So that's the first question that a lot of people might answer is to say, well, with the advent of something like Chat GPT, I can dump a bunch of French text into or English text into Chat GPT and translate it to French and learn a menu that way. 

But ultimately, we think the value resides in their ability to employ AI within their business model to accelerate the pace of content creation and you'll see that they've significantly up the speed at which they're bringing new content to market, be it a language, new language courses or things like chess, mathematics, music even. They've expanded the range of course content that they offer, but at the same time, they've also created a very curated learning experience. So, the value in the AI is how you actually curated for the customer to provide a learning experience that's guided.

Obviously, there are professionals behind that who do that. So, it's utilising AI to speed up your business process, but recognising that there's still value in how you curate content for users. At the same time, they've got a new version of the app where you can now converse with a virtual character within Duolingo, where it's not just a case of being able to enter text or say a word without much feedback you can now have a conversation with an AI, call it bot, within their app and we think that's quite valuable. And certainly, it's the fastest-growing part of their app at the moment.

Linda van Tilburg (05:43.258)

Can we look at the Magnificent Seven stocks? They dominated for years. So, do they still have the fundamentals to lead the market?

Sean Ashton (06:03.502)

I don't think that they necessarily have to be market leaders. I think leadership could shift. When I talk about market leadership, I mean the stocks that create most of the outsize alpha for the indices as a whole. I think they can still do well in aggregate, but the market has become a little bit more discerning, and they're not all moving as a group like they would have done in prior years. Obviously, Nvidia is the poster child for the AI revolution up until earlier this year. 

But now you've got other considerations that are coming in and you've seen a significant derating of their multiple. It's gone from a 45 forward PE to a 25 forward PE. And to my mind, that's the market starting to think about what happens beyond the next year or two in this AI capex boom, because ultimately that's what's driving their turnover, is somebody else's capex decision.

 And at a certain point in time, that's going to peak and potentially taper off, we just don't know when. But as they get bigger and bigger, it becomes more front of mind for shareholders. And they're also earning peak margins right now. Are margins sustainable at a 60 % operating profit margin? That's the highest it's ever been. So, these are question marks that are coming into the Nvidia investment thesis. I think they can still do well. But it's not just a one-way bet like it might have been a year or two ago.

But the same token if you look at some of the other names, Apple's obviously been a big performer over the years, and they've benefited handsomely in recent years by a significant shift in their earnings mix away from just devices to their services ecosystem where you've now had the benefit of a much larger installed base. 

Estimates are roughly that there's one and a half billion iPhones in use today and as that installed base continues to grow, so you're able to sell more services to that user base, which has resulted in a significant chunk of their earnings coming from services today, like 40 % of their gross profit, more or less. And that's up significantly over the last five years, that earnings mix. That's a very high, stable, recurring revenue stream, unlike devices, which have a cycle.

Sean Ashton (08:26.038)

But I think what the market is starting to potentially be concerned about is the fact that you just have not seen this replacement cycle coming through for their devices, in the main, iPhone obviously, which is their most important product. In a way, they could be a victim of their own successes in prior years, where the iPhone has become such a good product that the improvements with each iteration are more incremental, the battery life is much better, so you don't have the same impetus to need to upgrade, and this has resulted in effectively the replacement cycle blowing out substantially. 

People keep these devices for a lot longer than they used to. They don't need to upgrade every second year. You can keep them for four or five years. And so, your average age of an iPhone is growing dramatically, which is great for the services business, but ultimately, in the sense that you've got more of these devices in use and the second-hand market is alive and well. But at the end of the day, from an earnings point of view,

It's still the majority of their earnings is the selling of new devices, and you need to see a cycle coming through, and you haven't for quite some time, and so I think the market has started to get a little bit impatient with Apple's lack of momentum in new device sales.

Linda van Tilburg (09:39.298)

Can we look at Alphabet? I saw in your report you said it's being treated as a melting ice cube by the market. Is this justified or is there a turnaround play investor should be watching?

Sean Ashton (09:49.038)

Look, I think it's premature to talk about a turnaround in the sense that the profits are still growing year on year, let's be clear. So, it is not a business in distress. That's the first point to make. It's a highly profitable business, but what the market has begun to sniff out and when I say being treated as a melting ice cube, the valuation has pretty much collapsed in recent years from well north of a 420 PE to, I think, as recently as a few weeks ago it was like a 16, 17 forward multiple, which is a deep discount to the S &P 500 and that is reflective of market concerns that are sped out as being.

In summary, they are a one trick pony because the search business is the biggest part of their profit pool by a mile, and they've enjoyed this pretty much close to a monopoly in the internet search for twenty to twenty-five years. For the first time in their history, they've now got real competition coming through from AI search, we've got these new large language models being developed. I think that there's an argument to be made that it's starting to change people's habits, and so you used to Google something if you wanted information, but now there are other alternatives.

I just noted in my own personal use that for certain research functions, I use GROK, for example, we spoke about it earlier, ChatGPT, and it's changed my personal habits. I reckon that my personal market share, which is an eyeball market share of time spent on Google search, has gone down. There's no doubt about that in my example. And so ultimately, I think whilst you're still seeing revenue growth, the risk that they have in their search businesses is that you get a loss of market share over time in terms of advertising expenditure. 

And you've seen businesses like Meta growing their top line significantly faster than Alphabet in recent reporting periods. So, I think the market is concerned that there's a terminal value risk associated with Alphabet's search business. Yes, they do have a second-tier cloud business that is becoming much more profitable and growing very rapidly. They also have other bets, which include things like Waymo, but in the aggregate, those are loss-making. And so right now, from a profit point of view, today, Search is really the dominant player, and there are question marks around their long-term moat in that business.

Linda van Tilburg (12:27.541)

So, with the AI revolution semiconductor companies like Nvidia in particular, we're the first beneficiaries. Who now holds the baton in the AI value chain?

Sean Ashton (12:38.83)

Look, I think from a profit pool perspective, that's still very much the case. So, in terms of dollars being spent today, Nvidia clearly is the major beneficiary of that investment boom. But in terms of value creation or incremental value uplift, we spoke to things like Palantir earlier. We cited the example of Duolingo. These stocks are up 50 % plus year to date. That's where the market is starting to search for the next phase of uplift - businesses that will benefit from implementing AI into their business models. And the benefit of all that silicon being employed in businesses is that they can leverage their software on top of that silicon to enhance business processes. So, the software layer effectively is where you have seen disproportionate returns this year to date and that could continue.

Linda van Tilburg

Okay, shall we talk about Tesla? What is going on with Tesla?

Sean Ashton (13:54.798)

Tesla is an interesting one; it's a bit of an enigma, despite the fact that they, for quite some time, have not been delivering growth. It still trades at a crazy high multiple. So, it has this band of followers who kind of believe in the autonomy vision of creating millions of humanoid robots that people will buy, and there'll be a massive addressable market for that. But when you look at the core business today of auto manufacturing and earning a gross margin and profits on that, that's actually gone significantly backwards. 

Their auto margins have collapsed in the last couple of years and the reason for that is principally, in the first instance you've had very high tight interest rate policy in most of the world, which is making any big ticket purchase item more expensive. They've tried to counter that by cutting their prices. They've adopted an approach of slashing their prices for their various models. I think their models are also getting quite old in the aggregate.

Cybertruck hasn't really hit its stride. It hasn't reached the volumes that would have been projected by Elon Musk. And he's obviously quite famous for putting out projections that don't meet their potential in the near term. But basically, it's been a story of volumes under pressure, prices under pressure and input costs have gone up. So, their gross margins have collapsed to pretty much where a traditional automaker would be, or if not worse in recent reporting periods. 

So, profits have been under pressure. You've also had this influence of Elon's time being pulled more and more into government circles with Doge in the US, and that's created somewhat of a backlash. I think from certain consumers in Europe, there's a big market share loss for Tesla in a lot of countries, and I think it would be fair to say that that's a reflection of distaste for his involvement in politics and the flavour of politics that the Trump administration represents. So, that's probably had some business influence on them. 

Having said that, the share still commands an amazingly high premium and I think that's a function of the market's belief, or certainly a cohort of shareholder beliefs that ultimately in the fullness of time, this will be an autonomy play, and a clean energy play in time to come with profits that will flow from that. To buy into this valuation today, kind of north of 200 times earnings, you have to believe that this will not just be an auto company in time, but that they will make a lot of their money in future from software, from autonomous driving, from selling of robots that will do household chores, that type of stuff. It does sound pie in the sky for me, but I would also say, at the end of the day, don't fully write off Elon Musk. He's come back from worse many times before.

Linda van Tilburg (16:58.444)

Okay, so can I just return to Palantir? So how much of the growth that we've seen is tied to government contracts versus organic enterprise adoption?

Sean Ashton (17:12.546)

So, historically, Palantir was very much a defence contractor in the early days. It was founded in 2003, and a lot of their software went into government contracts to do prevention of terrorist attacks, that type of thing. So, intelligence around trying to help governments foil the tax. So, it’ very much a defence contractor. 

In recent years, they have shifted more towards an enterprise model where they can utilise their software to help companies visualise their data and make more effective decisions within an enterprise more quickly and effectively, ultimately saving costs. It can have a wide range of applications around working capital needs or scheduling nursing hours in the hospital. There are many different applications. Because their software is very expensive, historically, there has been quite a long lead cycle of sales.

We're talking multi-million-dollar contracts that they typically have for most customers. It's not like a Microsoft 365 subscription. It's historically been a tough sell to enterprises. What they've recently done in the last 18 months to two years is have these what they call AIP boot camps where they get together at a conference and they invite companies to basically bring the information with, plug it into their system live on a screen and they demonstrate to them what they can do for the business. 

And that seems to have sped up the sales cycle quite significantly, where the onboarding of customers is happening much faster. So, the growth rate of the enterprise sales in the US specifically is way faster than government. I think they're growing at 70 % year on year in US commercial sales versus an overall growth rate of the high 30s for the group as a whole. So, that's where you're going to see this business heading in time, while the government remains strong, much more of an enterprise focus in time.

Linda van Tilburg (19:38.152)

Markets have been so volatile. How difficult is it to predict stock markets at the moment? When have you last seen this level of volatility?

Sean Ashton (20:04.142)

Every cycle is different, of course. I think, yes, it's been a very volatile period. At market extremes, you've got to decide: Are the share prices that are being placed in front of you? Does that make long-term sense in the context of sanity ultimately prevailing? And I think that there's been a lot of fear around the imposition of tariffs and what that means.

We still don't know exactly where we're to land, but markets also have a way of forcing policyholders' hands. That's the other point to make. I think you've seen the market volatility has provided a valuable feedback loop to the Trump administration, where I think you've seen a subtle shift, where they've dialled back perhaps the most aggressive aspects of their tariff policy because markets have told them this is not something that is going to go too well, right? That it's going to work out well for you. And so yes, we still have not seen where we ultimately land from a tariff point of view, but the feedback loops of markets have been quite valuable, certainly for the government trying to set policy.

Linda van Tilburg

Can we look at Duolingo and Palantir again? Their valuations are sky high, aren't they?

Sean Ashton (00:09.292)

Yes, that's true. It's fair to say that if you look at something like Palantir, it probably is the poster child for extremely high valuation in the market currently. Market leaders often do look very expensive, and they get backfilled by fundamentals coming through, but it's worthwhile touching on the numbers. So Palantir trades at more or less a forward 200 PE. And my read of that, and it's already quite profitable, so it's not even like you're putting a high multiple on very low earnings. The margins are there, it's very profitable. 

But basically, you need to believe that this business can grow its free cash flows at 30 to 40 per cent per annum for at least the next five to seven years, for this share price to make sense, and then you can rationalise it. But that is a tall ask. They could do better. It's not to say they can't do better, but it's a tall ask. There are a lot of expectations built in. And if there's disappointments along the way, like one bad quarter where they miss a key metric, it's the kind of stock that will be punished. But often this is what leaders look like, and they are very volatile.