We came across a bullish thesis on Duolingo, Inc. (DUOL) on Substack by Summit Stocks. In this article, we will summarize the bulls’ thesis on DUOL. Duolingo, Inc. (DUOL)’s share was trading at $294.18 as of March 17th. DUOL’s trailing and forward P/E were 156.48 and 112.36 respectively according to Yahoo Finance.
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Duolingo began as an academic project at Carnegie Mellon University in 2009, founded by Luis von Ahn and Severin Hacker with a mission to make high-quality language education accessible to everyone. The platform launched in 2012 and quickly grew, becoming the top free education app. Since its IPO in 2021, Duolingo has expanded beyond languages into subjects like math and music, serving over 116 million active users worldwide. Its gamified approach, which incorporates AI-driven personalization, streaks, and leaderboards, has redefined digital learning, making it both engaging and effective. Unlike traditional education methods, Duolingo’s bite-sized lessons and interactive exercises optimize retention while maintaining a casual and enjoyable user experience. Studies have shown that Duolingo is as effective as university-level courses, further solidifying its position as the leading language-learning platform.
Duolingo operates on a freemium model, offering free courses while monetizing through subscriptions, ads, in-app purchases, and the Duolingo English Test (DET). In 2024, 81% of its revenue came from subscriptions, with Super Duolingo and Duolingo Max providing AI-powered learning enhancements. The company’s data-driven approach, supported by extensive A/B testing and machine learning, allows it to refine lesson difficulty dynamically, increasing both engagement and conversion to paid plans. Additionally, Duolingo’s vast data collection enables continuous improvement, creating a self-reinforcing flywheel that drives organic growth through word-of-mouth. The company’s expansion into math and music has already attracted 3 million daily active users, with long-term plans to scale these offerings into K-12 and college-level education, further broadening its total addressable market.
Financially, Duolingo has demonstrated impressive growth, with a 41% year-over-year revenue increase in 2024 and a five-year CAGR of 60%. The company’s ability to convert free users into paying subscribers is a key driver of its success, with 34% of its monthly active users engaging daily and over 8% opting for premium subscriptions. In 2024, Duolingo achieved its first positive operating income, reporting $62.6 million in operating profit with an 8.4% margin. Its asset-light, high-margin business model supports strong free cash flow generation, consistently exceeding operating income due to efficient capital management. With over $870 million in cash and no debt, Duolingo’s financial position is robust, providing flexibility for potential shareholder returns in the future. Founders Luis von Ahn and Severin Hacker maintain control through a dual-class share structure, ensuring long-term alignment with investors.
Despite its strengths, Duolingo faces competitive pressures from traditional education, alternative language-learning apps, and AI-powered tools. While AI presents both opportunities and risks, Duolingo’s structured, gamified approach differentiates it from translation-based solutions, reinforcing its role in language acquisition. Economic downturns could pose a challenge, particularly given Duolingo’s reliance on discretionary consumer spending. The company has never operated through a recession, leaving uncertainty around its ability to sustain growth under macroeconomic pressures.
Duolingo’s stock has declined over 33% in the past month. While its 2.2% free cash flow yield suggests a reasonable valuation given its growth trajectory, a reverse DCF analysis indicates that sustaining 19% annual free cash flow growth is necessary to justify current levels. While this target appears achievable in the near term, long-term sustainability remains uncertain, particularly given the impact of stock-based compensation. Management expects 30% revenue growth in 2025 with further margin expansion, implying that required free cash flow growth is conservative. If Duolingo’s revenue growth slows from 33% in 2025 to 10% in year 10, the stock could still generate an 11.5% annual return, although dilution remains a factor.
While Duolingo’s growth story remains intact, its current valuation lacks a significant margin of safety. The company has a dominant market position, strong brand, and expanding product suite, but at current levels, the risk-reward profile appears unfavorable. Waiting for a better entry point amid market weakness would be a more prudent approach.
Duolingo, Inc. (DUOL) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 52 hedge fund portfolios held DUOL at the end of the fourth quarter which was 31 in the previous quarter. While we acknowledge the risk and potential of DUOL as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DUOL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.