Is Duolingo Stock a Buy?

Shares of the prominent online education company Duolingo (DUOL 0.41%) have shown remarkable gains for investors in the past year. The stock hit a low of $121.89 last August but reached a high of $251.30 in May before dropping amidst the recent market sell-off.

The company’s share price is now on the rise again following a strong second-quarter earnings report. Duolingo’s Q2 revenue surged by 41% year over year to $178.3 million, indicating a series of successful achievements in the quarter.

Considering the upward momentum in the share price, one might wonder if investing in Duolingo stock for the long term is a wise decision, and if so, whether the current moment presents an opportune time to make a purchase. Let’s delve into an analysis of the education company to arrive at an informed answer.

Driving Forces Behind Duolingo’s Success

Duolingo has built its reputation primarily as an online language-learning app, with an expanding range of course offerings. The company distinguishes itself by providing access to learn over 40 languages for free, a crucial factor in fueling its success.

Offering free lessons enables Duolingo to attract consumers to try its platform, paving the way for the establishment of a substantial user base over time. As of the end of Q2, Duolingo recorded 34.1 million daily active users (DAUs), marking a 59% rise from the previous year.

While the company generates income through advertising to its vast user base, the major share of revenue comes from subscribers, playing a pivotal role in its prosperity. Duolingo adopts a freemium pricing model, allowing users to opt for an ad-free experience by paying a subscription fee.

In Q2, eight million users subscribed to Duolingo. Though this represents a fraction of the overall user base, subscribers contributed $143.9 million to the total Q2 revenue of $178.3 million.

Strategies for Continued Growth

Given the significance of subscription revenue, Duolingo is committed to expanding its subscription base. An essential strategy in this endeavor is the introduction of a premium subscription tier, Duolingo Max.

Duolingo Max offers advanced features powered by artificial intelligence, such as AI-driven conversational practice in the user’s chosen language. Initially launched in select English-speaking countries in 2023, the Max tier is now expanding its reach. By the end of Q2, it was available in 27 countries, catering to 15% of the total DAUs.

The company anticipates complete global availability of Duolingo Max by the end of the year. Despite not disclosing specific revenue figures for Max, CEO Luis von Ahn expressed optimism about its broader rollout, indicating the potential impact to be more evident in 2025.

In addition to Duolingo Max, the company aims to enhance revenue growth by increasing DAUs through the implementation of new social-oriented features to boost user engagement. For instance, the introduction of a “friend streak” feature encourages friends to practice together on the platform, contributing to a 59% year-over-year growth in DAUs for Q2.

Furthermore, Duolingo has developed an effective marketing strategy that leverages social media and partnerships to attract users. This approach, successfully tested in Japan, led to a 93% increase in Q2 DAUs in the country compared to the previous year, with plans for expansion to other regions.

Investing in Duolingo Stock

Reflecting on its strategies, Duolingo has consistently achieved double-digit sales growth annually since its public debut in 2021.

Data by YCharts.

The company anticipates sustained sales growth in Q3, with revenue projected to surpass $186.7 million, representing a significant increase from 2023’s $137.6 million.

This robust top-line growth has translated into impressive financial performance for Duolingo. In Q2, net income surged to $24.4 million from $3.7 million in the prior year, while free cash flow rose by 60% year over year to $54.9 million.

Moreover, Duolingo’s Q2 balance sheet exhibited strength, with assets totaling $1.1 billion against total liabilities of $372.5 million. Notably, a substantial portion of liabilities ($291.5 million) comprised deferred revenue, waiting to be recognized as income in the future.

Given its stellar Q2 results, Wall Street analysts hold an overweight rating on Duolingo stock, with a median price target of $240.50. This indicates an optimistic outlook for potential upside in the stock.

With innovative offerings like the AI-driven Max subscription and strategies geared towards growing its user base and revenue, coupled with solid financial health, Duolingo presents an appealing long-term investment opportunity.

While the current price hovers around $200, it may be prudent to monitor the stock and wait for a potential dip before making an investment.