Duolingo’s AI-Driven Growth Faces Market Challenges

Duolingo (NASDAQ: DUOL) operates the world’s largest digital language education platform, offering engaging and interactive lessons through smartphones. The company is actively incorporating artificial intelligence (AI) to enhance user experience, and its efforts are proving successful.

However, after reaching a new record high, Duolingo stock experienced a setback in February, falling 14%. This decline was influenced by an overall market sell-off and was compounded by Duolingo’s financial results announcement for 2024 on February 27. While the results were robust, the guidance for 2025 indicated a slowdown in revenue growth.

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Should investors view this recent decline as a chance to buy?

Image source: Getty Images.

Duolingo Leverages AI Technology

As of the end of 2024, Duolingo reported a record 116.7 million monthly active users (MAUs), reflecting a 32% increase year-over-year. Notably, 9.5 million of those users were paying subscribers, up 43% from the previous year. The platform employs a freemium model, monetizing the majority of users through ads while enticing a growing number to pay for premium features that enhance their learning journey.

AI is crucial in transforming free users into paying subscribers. In 2023, Duolingo launched the Max subscription tier, introducing innovative AI-driven features such as Explain My Answer, which provides personalized feedback, and Roleplay, an AI chatbot that supports language practice. These tools enhance the educational experience and user engagement.

In addition, the company unveiled a new AI learning tool called Video Call, featuring a digital avatar named Lily, who assists users in practicing speaking skills across various topics. This feature simulates real-world conversations, allowing users to prepare for international travels, for example, by recalling previous interactions to create a personalized learning experience.

Currently, the Max tier constitutes approximately 5% of Duolingo’s total subscribers, with CEO Luis von Ahn noting that adoption rates have exceeded expectations. The company’s vision is to provide a learning experience comparable to that of a human tutor, and the AI capabilities in the Max plan are advancing this objective.

Revenue Growth and Rising Profits

Duolingo achieved revenue growth of 41% in 2024, totaling $748.0 million, surpassing the company’s anticipated figure of $744.0 million, which had been revised upwards three times throughout the year. However, the outlook for 2025 predicts revenue growth will decelerate to around 30%, aiming for total revenue of approximately $970.5 million at the midpoint of guidance.

Despite this anticipated slowdown, a 30% growth rate remains attractive, especially given the substantial progress Duolingo has made in profitability. The company reported net income of $88.5 million in 2024, a staggering increase of 451% compared to 2023. Operating expenses rose only 20% during the year, enabling the bulk of revenue growth to contribute directly to the bottom line.

Duolingo is strategically balancing spending in areas like marketing and research and development to sustain revenue growth while maintaining long-term profitability. This approach aims to ensure the company’s business model remains sustainable and reduces the dependency on external cash injections. If profitability continues to rise, Duolingo may eventually return capital to shareholders through dividends and stock buybacks.

Should Investors Buy Duolingo Stock Now?

Duolingo is a strong performer with rapid growth across key metrics. However, even with February’s 14% decline, its stock remains relatively expensive. It currently trades at a price-to-sales (P/S) ratio of 19.7, reflecting a 27% premium over its historical average of 15.5 since its public debut in 2021.

Data by YCharts.

Recently achieving profitability, Duolingo’s price-to-earnings (P/E) ratio is around 166, significantly higher than the S&P 500 index. However, analyst estimates predict that earnings per share could rise to $5.78 in 2025, yielding a forward P/E ratio of 54, which, despite being a premium, may offer a more reasonable valuation perspective.

Data by YCharts.

In conclusion, while Duolingo’s stock is currently valued on the higher side, it could still prove to be a worthwhile investment. Investors considering a purchase should be prepared for a long-term hold; in five years or more, today’s prices might appear to be a bargain.

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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool recommends Duolingo. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.