Is Duolingo’s Stock Set to Crush the S&P 500 in Just 1 Year?

Duolingo (DUOL 1.49%) went public during the buying frenzy in hypergrowth stocks in late 2021. That bullish sentiment initially lifted Duolingo’s stock, but it lost its luster as its growth cooled off and rising interest rates compressed its valuations.

Despite those challenges, Duolingo’s stock advanced about 13% over the past 12 months and remains more than 70% above its IPO price. But it still underperformed the S&P 500, which rallied 27% during the same period. So today, let’s take a fresh look at Duolingo’s stock and see if it can beat the benchmark index over the next 12 months.

Image source: Getty Images.

How fast is Duolingo growing?

Duolingo initially carved out a niche with its eponymous language learning app, which gamified the experience with gems and rewards. It became the most downloaded online learning app in the world, and it expanded its reach with online courses for more than 40 languages, a stand-alone English proficiency test, and newer apps for learning phonics, math, and music.

Duolingo monetizes its free users with ads, while its paid subscribers gain an ad-free experience with additional perks. It provides its English proficiency test as an a la carte service. It experienced a major growth spurt during the pandemic’s height as more people stayed at home and spent their free time taking online language classes.

Duolingo’s revenue surged 128% in 2020, but it continued growing at a compound annual growth rate (CAGR) of 49% from 2020 to 2023 even as the pandemic passed. Between the fourth quarters of 2020 and 2023, its monthly active users (MAUs) more than doubled from 36.7 million to 88.4 million, its daily active users (DAUs) more than tripled from 8.2 million to 26.9 million, and its number of paid subscribers more than quadrupled from 1.6 million to 6.6 million. In 2023, it generated 80% of its total bookings from subscriptions — compared to 76% of its bookings in 2020.

Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) turned positive in 2020 with a margin of 2%, and that figure climbed to 18% in 2023. It also turned profitable on a generally accepted accounting principles (GAAP) basis for the first time in 2023. Those rising margins and profits indicate that economies of scale are kicking in as it gains millions of new users and converts them to paid subscribers.

Why did Duolingo underperform the market over the past year?

Over the past year, Duolingo has continued to gain DAUs, MAUs, and subscribers at high double-digit rates. Its bookings and revenue growth remained robust, and its adjusted EBITDA margins expanded consistently year over year.

Data source: Duolingo. YOY = Year-over-year.

For the second quarter, it expects its bookings to rise 28% to 30% year over year, its revenue to grow 51% to 53%, and for its adjusted EBITDA margin to come in at 21% to 22%. For the full year, it expects its bookings to increase 30% to 31%, its revenue to rise 37% to 38%, and for its adjusted EBITDA margin to expand to 23% to 24%. Those growth rates make it one of the market’s fastest-growing educational app developers.

Duolingo plans to accelerate its expansion while cutting its costs with generative AI tools. It’s already using generative AI to produce more online courses at a faster rate, and it recently laid off about 10% of its contractors as part of that shift. It’s also been gradually rolling out a third paid tier, Duolingo Max, which features AI-driven conservations.

With an enterprise value of $6.7 billion, Duolingo trades at about 9 times this year’s sales and 38 times its adjusted EBITDA. Those valuations look reasonable relative to its growth rates, but it’s not a screaming bargain either. Investors should note that Duolingo still trades at a steep premium to slower-growing education stocks like Coursera and Chegg, which trade at about 2 and 1 times this year’s sales, respectively.

Will Duolingo outperform the market over the next 12 months?

Duolingo’s core business is still firing on all cylinders, but high interest rates discouraged investors from aggressively accumulating smaller growth stocks over the past year. But with interest rates set to stabilize or even decline over the next few quarters, Duolingo should become an attractive investment for growth-oriented investors again. In other words, this stock has a clear shot at outperforming the S&P 500 over the next 12 months.