Can Buying Duolingo Stock Now Still Translate Into Gains?

Duolingo (NASDAQ: DUOL) stock has yet another winner in the artificial intelligence (AI) race. The educational app has enjoyed massive subscriber growth and become a more valuable tool as it expands beyond languages and leverages AI to improve the learning experience.

However, amid its AI push, shares of Duolingo have surged more than 230% higher since the beginning of 2023. That performance may leave investors wondering how much potential there is for the stock to deliver further gains.

The state of Duolingo

Duolingo offers a popular learning app that teaches users popular languages like Spanish and Japanese, and even less common languages such as Welsh or Esperanto. It has also ventured outside of languages into areas such as math and music.

Aside from the breadth of tools, it has also applied AI to the learning process. This AI product, called Duolingo Max, applies OpenAI's GPT-4 to two of its apps, Roleplay and Explain My Answer. Such apps help users practice language skills and better understand a language's nuances.

Consequently, Duolingo has experienced massive growth in the popularity of its app. Monthly active users rose to more than 88 million in the fourth quarter, up 46% year over year. The most notable increase came with daily active users, which rose 65% to nearly 27 million.

Duolingo's financials

Unsurprisingly, the strong user growth has boosted Duolingo's financials. Revenue climbed 44% last year to $531 million, and subscription bookings increased 49% to $496 million.

Over the same time frame, operating expenses rose only 20%, but the company's $16 million of full-year net income was only possible thanks to $31 million in interest income. But if Duolingo can maintain this pace of progress, it can generate an operating profit in the near future.

The company's outlook supports that possibility too. For 2024, Duolingo forecasts $718 million to $730 million in revenue, a 36% increase at the midpoint.

Nonetheless, with the recent rally, Duolingo's valuation has become a concern. At a price-to-sales (P/S) ratio of 20, it trades just shy of a multiyear high. And its forward price-to-earnings (P/E) ratio of nearly 70 is another sign the stock has moved ahead of its fundamentals.

Should you buy Duolingo stock?

Considering Duolingo's valuation, investors should approach the stock cautiously if they buy it at all. Despite its promising outlook, Duolingo is arguably priced for perfection, which means the stock could tumble at the smallest sign of weakness.

So whether Duolingo stock ends up retreating or pushes forward from current levels, it's a stock investors should be prepared to hold long term. As the company leverages advancements in AI to improve its learning experiences, its tools could lead to both smarter users and wealthier investors with enough time.

Should you invest $1,000 in Duolingo right now?

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Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Duolingo. The Motley Fool has a disclosure policy.

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


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