Is Duolingo Stock a Buy in the Second Half of 2025?

Yahoo

2 days ago

Duolingo delivered a record performance in 2024.
It has the potential to sustain its growth momentum for the foreseeable future.
The stock's high valuation should give investors pause.
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Duolingo (NASDAQ: DUOL) stock has been on fire recently. In the last 12 months, it has risen 164% due to strong financial results and growth prospects.
If you missed out on that impressive rally, you may now be considering initiating a position in the stock. Here's what you need to know about this high-growth tech company.
Duolingo offers the world's No. 1 language learning app, and it enjoyed a stellar 2024. All key metrics, including revenue, bookings, and net income, reached record levels. Revenue surged 41% to $748 million, while net income rose more than sixfold from $14 million to $89 million.
And the company kicked off 2025 with a bang as well. For the first quarter, revenue jumped 38% year over year to $231 million, and bookings increased 38% to $272 million. Its adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) margin also improved about 900 basis points to 27.2% for the quarter.
The foundation of that strong performance is steady user growth. Monthly active users (MAU) reached 130.2 million, up 33% year over year. Daily active users saw an even bigger boost, up 49% to 46.6 million.
But overall user growth is just one part of the story. Duolingo is also improving its paid subscriber penetration rate, which increased year over year from 8.6% to 8.9%. Ongoing improvements to its content and user experience have led to better user engagement. The app's virtual assistant Lily, for example, allows Duolingo Max subscribers to practice their language skills in a fun, low-stakes environment to help them gain confidence over time.
Despite the company's already impressive reach and scale, its has a long growth runway. Management says the online language learning industry will be worth $47 billion in 2025, just a small slice of the $6 trillion of annual global education spending.
The company also estimates 2 billion people worldwide are learning a new language. And of its 130.2 million MAUs, less than one in 10 are paying subscribers, giving the tech company a huge opportunity to grow its user base and convert them over time.
To this end, Duolingo's continuous improvement efforts should significantly contribute to attracting, retaining, and converting normal learners to paid subscribers. It has added new subjects, such as music and math, in an effort to expand beyond its language courses.
Introducing artificial intelligence to the platform is another example of how Duolingo is working to improve learning outcomes. The company plans to enhance the user experience by making Lily and her environment 3D with interactive backgrounds to make conversations more immersive for learners.
While there are many things to like about Duolingo's solid execution and growth prospects, the stock doesn't come cheap. As of this writing, it boasts a price-to-earnings ratio of more than 250. Even if you believe this is a growth-first story and focus on its price-to-sales valuation instead, at 30 times trailing revenue, Duolingo is one of the most expensive large-cap stocks in the Nasdaq Composite index.
A premium is expected for most growth stocks, but paying such a hefty price comes with significant risk. Even a small hiccup that calls Duolingo's bullish outlook into question could see its valuation contract dramatically.
That potential for short-term volatility, however, shouldn't immediately scare investors away from a company that's clearly firing on all cylinders as it tackles a massive market opportunity. With that in mind, a position in Duolingo makes the most sense for investors with a long investment horizon of at least five years -- or an immense risk appetite.
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Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool recommends Duolingo. The Motley Fool has a disclosure policy.
Is Duolingo Stock a Buy in the Second Half of 2025? was originally published by The Motley Fool