Duolingo: Love the Business, Don't Love the Valuation
40%+ revenue growth, 73% gross margins, 26% adjusted EBITDA margins, pristine balance sheet - what's not to love? The valuation ...
Summary
Duolingo is the largest global language learning platform, with 116m monthly active users and 9.5m paid subscribers.
In 2024, Duolingo grew revenues by 41% and reported 26% adjusted EBITDA margins.
Duolingo continues to increase its total addressable market by expanding internationally, launching new verticals (e.g., maths, music, chess), and launching premium AI-enabled language learning tiers.
Duolingo trades on a rich multiple of 17x forward revenue and 66x forward earnings.
While Duolingo is a high-quality business, the current valuation does not present an attractive risk reward, so I rate Duolingo a hold.
Introduction
Duolingo (NASDAQ:DUOL) is the largest global language learning platform with gamified courses for over 40 languages. Duolingo is one of the highest quality businesses I have come across in public markets, especially in the notoriously tricky consumer subscription space. Duolingo has:
Deep AI expertise and high product velocity
Consistent 40%+ revenue growth since IPO
Over 80% recurring revenue via subscriptions
Very high brand recognition, leading to efficient customer acquisition (over 80% of traffic is direct to Duolingo)
Strong profitability - 25% adjusted EBITDA margins in 2024
A pristine balance sheet - $878m cash and equivalents with no debt
I first recommended Duolingo on Seeking Alpha in September 2022 when shares were around the $90 mark. Since then, Duolingo shares up over 4-fold, substantially outperforming the market.
Since this first recommendation, Duolingo has continued to report strong growth in their core language learning app, while expanding into other verticals like maths, music, and very recently chess. In short, Duolingo is transitioning from a single product company into a diversified education platform.
While I continue to believe Duolingo is a very high-quality business and recent product expansion only reinforces my conviction in management, shares have largely taken a straight line up since 2022 and the current valuation looks stretched at 17x forward revenues and 66x forward earnings. While I remain a holder, I am not adding at these levels, and I am looking for a decent pullback to consider adding to my position.
Duolingo Financial Overview
Duolingo is the dominant language learning app globally with over 116m monthly active users (MAUs), 40m daily active users (DAUs), and 9.5m paid subscribers.
Over 80% of revenue come from their core subscription plans which have a range of tiers and enable users to avoid ads.
Since their IPO in July 2021, Duolingo has reported significant improvements in all core financial metrics.
Revenue
Annual revenue growth has exceeded 40% in every calendar year since IPO, bucking the trend of almost every other software company that have seen material revenue deceleration since the 2021 peak. In 2024, Duolingo reported $748m revenue, up 41% YoY, and is guiding for 30% revenue growth in 2025 to $971m (note: management historically have guided conservatively so I would expect 2025 revenue to exceed $1b).
Gross Margin
Gross margin has remained remarkably consistent since IPO, reaching 73% in 2024, even as Duolingo has invested in newer product offerings (e.g., maths, music) and their Duolingo Max subscription (their most expensive language subscription offering which has interactive video calls powered by AI).
While gross margin may come under short-term pressure due to increased demand for Duolingo Max (there is an associated cost to using large language model providers like OpenAI for video calls), it should remain above 70% for the foreseeable future, consistent with a high-margin software business.
Profitability
Arguably the biggest change in the equity story for Duolingo since IPO has been their transition from a loss-making business into a highly profitable and cash generative business.
Adjusted EBITDA has improved from a $1.1m loss in 2021 to a $191.9m profit in 2024, representing a 26% adjusted EBITDA margin.
For those who prefer GAAP measures over adjusted EBITDA (includes this author), Duolingo has improved from a $60.1m net loss in 2021 (-24% margin) to generating $88.6m of net income in 2024 (12% margin).
Duolingo also reported $275m of free cash flow in 2024, representing a phenomenal 37% margin. The delta between free cash flow and other profitability metrics is largely the result of their favourable working capital cycle - customers pre-pay for subscriptions in advance (monthly or annual) before the service is delivered.
Such improvement in profitability has not come from aggressive cost cuts or a substantial pullback on R&D investments in innovation, but rather is a result of gradual operating leverage as consistent revenue growth above 40% has outpaced growth in associated operating costs. In his excellent book 'Nothing But Net', renowned technology analyst Mark Mahaney argues that operating leverage driven by revenue growth (vs. financial engineering or aggressive cost cuts) tends to be highly rewarded by public market investors, which is clearly evident in a chart of Duolingo's stock price since IPO.
Duolingo management continue to remain very positive on the outlook for profitability in 2025, expecting incremental adjusted EBITDA margins of 30-35%:
For 2025, we expect to expand our adjusted EBITDA margin by nearly 200 basis points to 27.5% as we continue to gain leverage across all categories of OpEx. And we expect our incremental margin to be between 30% and 35% for the year. (Duolingo CFO Matt Skaruppa, Q4 2024 Duolingo Conference Call)
Balance Sheet
Duolingo's balance sheet is pristine, with $878m cash and equivalents and no debt. The business generates strong operating and free cash flow and has limited outstanding liabilities, including very low accounts payable.
Duolingo is very well positioned for a potential macroeconomic slowdown (which will hurt consumer discretionary spending) and has the flexibility to either invest aggressively to further cement their market leadership or engage in M&A (i.e., AI-related acquisitions) if attractive opportunities present themselves.
Investors should sleep well at night knowing this is a business with no debt and a balance sheet that will continue improving with each successive profitable quarter.
TAM Expansion #1 - International Growth
Duolingo is a global business with a core total addressable market of 2 billion language learners (the number is even larger if we include maths, music, and chess learners).
The number of people who are learning a language in the world is about 2 billion. We have about 100 million monthly active users, so there's a lot of runway in there. And so we're just going to continue growing. (Duolingo CEO Luis von Ahn, Q3 2024 Conference Call)
While Duolingo has a very strong presence in established countries like the USA, there is also a substantial opportunity to continue to increase their penetration in high-growth markets like Asia and Latin America, where they have lower market share.
Now, in terms of what are – where are we more or less penetrated, generally, Asia is the place where we are least penetrated, simply because we started much later there. And so I think there is a huge opportunity there. Places like Japan, Korea, India, China, I think there is a huge opportunity there. (Duolingo CEO Luis von Ahn, Q4 2024 Conference Call)
Probably our most mature region is Latin America, but it’s also growing very fast. That’s actually growing at like 80% year-over-year. So we’re – what that tells us is that we really are far from saturating any of our markets. We’re just – we’re growing pretty fast in all of our markets. (Duolingo CEO Luis von Ahn, Q4 2024 Conference Call)
Duolingo benefits from attractive structural tailwinds in growing markets like Asia and Latin America, including a rising middle class, increasing smartphone adoption, improving wi-fi connectivity, and that English continues to remain the dominant language for international commerce. With just over 5% market share of a very large global market of 2 billion language learners, Duolingo has a very long growth runway.
TAM Expansion #2 - New Verticals (Maths, Music, Chess)
Duolingo's core language learning products still account for 90%+ of users and revenue, but the business is rapidly diversifying into other verticals like maths, music, and chess. Duolingo integrated maths and music courses into their flagship learning app in late 2023, but only announced the launch of their chess product in the last week (April 2025).
Such verticals benefit from similar growth tailwinds to language learning:
There is large global demand to learn these skills (albeit more for personal curiosity than career necessity like a language)
Legacy methods of learning such skills are often boring and drop-out rates are very high (think about how many people try and learn piano on their own but quit within a week)
The cost of hiring a personal tutor is much more than the cost of an equivalent Duolingo subscription (by my estimates, the cost of an annual Duolingo premium subscription in Australia costs the same as about two hours of 1:1 language tutoring with a tutor)
In a short space of time, Duolingo's maths and music verticals have already reached a combined 3m DAUs, approximately 7% of total DAUs, and growth in these newer verticals is outpacing growth in the core language learning business:
So we’re very excited about Math and Music. Like we said, we now have about 3 million daily active users studying Math and Music. For your question for AI – and by the way, I should also say, those two are – those courses are growing faster than our language learning courses. So we do expect that these will continue being a larger and larger fraction of our whole pie. (Duolingo CEO Luis von Ahn, Q4 2024 Conference Call)
In the last week, Duolingo announced the launch of a chess product, continuing to demonstrate their high product velocity and culture of innovation. In the chess market, Chess.com appears the clear leader with over 200m members and 1.5m paid subscribers. A recent podcast with the CEO suggests the business is generating well over $100m revenue, so there is a meaningful revenue opportunity available for Duolingo.
Such product expansion into maths, music, and chess boosts Duolingo's TAM and improves revenue diversification. I will be closely following the progress of these newer verticals in upcoming conference calls and would not be surprised for them to collectively reach 10-15% of total DAUs in the short-to-medium term (up from 7% as of Q4 2024).
TAM Expansion #3 - Attracting Hardcore Language Learners with Duolingo Max
Duolingo launched their ultra-premium subscription tier (Duolingo Max) in March 2023, but did not begin aggressively scaling the service until 2024. In most developed markets, Duolingo Max costs about twice that of their regular premium subscription tier.
Duolingo Max leverages large language models from OpenAI to provide a highly interactive tutoring service much more akin to the experience of a traditional tutor, but still at a fraction of the cost. On Duolingo Max, language learners receive detailed mistake explanations and can engage in real-time video calls with an avatar.
Given the price point, Duolingo Max has the highest lifetime value of all subscription tiers and generates more gross profit dollars than their regular premium tier. As such, any incremental Duolingo Max subscribers (either upgrades from an existing plan or a new customer who signs up to Duolingo Max) is highly accretive to revenue and gross profit growth.
To date, adoption for Duolingo Max has been impressive, quickly reaching 5% of total paid subscribers:
Since launching Video Call, our GenAI-powered conversation feature, user engagement has grown meaningfully. Max is now available to the majority of our DAUs and represents about 5% of total subscribers. We are still very early in driving Max monetization and believe there is a lot of room to grow. (Duolingo CEO Luis von Ahn, Q4 2024 Conference Call)
Expansion of Duolingo Max will be a material driver for Duolingo over the coming years, and its growth will be a core metric for investors to follow.
Valuation - The Missing Piece of the Puzzle
While Duolingo is a world-class business with an attractive financial profile and a track record of product expansion, it is currently being priced for perfection.
One of the core lessons that investors should have learned from the 2022 sell-off in technology stocks is that there is a difference between a great 'business' and a great 'investment'. While Duolingo was a steal at $90 in late 2022 (hence the >4x return over the subsequent 2.5 years), the current valuation appears stretched and investors seem to more than appreciate the quality of Duolingo's business model.
My best personal investments have been during periods where public market investors fundamentally under-appreciated the underlying quality of a company's business model - examples are Spotify (SPOT) in late 2022 at a share price of $70 (now over $600) and MercadoLibre (MELI) in mid-2022 at a share price of $650 (now over $2,000).
Duolingo Valuation Comps
Duolingo currently trades at an enterprise value to last 12 month (LTM) revenue multiple of 21.5x, close to their peak in 2021 before shares sold off over 60% in late 2022. I have used a revenue multiple here as Duolingo was not profitable in 2021 or 2022, so earnings multiple are not a helpful comparison for these years.
As a general rule (with rare exceptions), consumer subscription businesses have less attractive unit economics than comparable B2B subscription businesses due to higher churn, lower lifetime values, and greater reliance on paid marketing channels.
As such, consumer subscription businesses tend to trade at lower multiples than B2B subscription businesses, but Duolingo is currently being priced above some of the highest-quality B2B subscription businesses on the public markets with solid double-digit revenue growth and <10% annual churn (Duolingo almost certainly has >30% annual churn, although this is not publicly reported).
Note: the author has used a forward P/E multiple for peer comparisons as this is the metric most equity analysts refer to for valuation purposes.
Duolingo's forward P/E multiple also sits above a basket of other well-known US-listed consumer subscription businesses, including very established companies like Spotify (SPOT), Netflix (NFLX), and Hims & Hers Health (HIMS).
While arguments can be made that Duolingo has higher growth and comparable or better margins than these competitors, I would argue that Duolingo's revenue is less defensible (they almost certainly have higher churn than Spotify and Netflix) and there are greater AI-related disruption risks for Duolingo (i.e., will people still need to learn a language if real-time language translation is made available via glasses or headphones?).
Internal Valuation Expectations
To round out this valuation analysis, I built a probability-weighted valuation model to estimate forward internal rates of return (IRRs) for Duolingo at the current valuation.
In these scenarios, I have assumed a range of growth rates to December 2028 (for revenue and net income) and exit multiples at December 2028 (enterprise value to LTM revenue, price to LTM earnings) and computed corresponding IRRs. The highlighted section is the probability-weighted outcome based on all five scenarios.
Under the revenue scenario, the probability weighted outcome is an 11% forward IRR, but the expected forward IRR for the earnings scenario is -10%.
Even under relatively aggressive base case assumptions, forward expected returns are poor:
Revenue scenario: 4% IRR assuming 30% revenue CAGR and exit at 9x LTM revenue
Earnings scenario: -15% IRR assuming 35% net income CAGR and exit at 30x LTM earnings
This analysis is consistent with the earlier comparison with public comps and suggests that Duolingo is richly valued. The business would need to hold its 40% revenue growth rate through to 2028 and maintain or expand net income margins, while exiting at healthy multiples (e.g., 12x+ LTM revenue or 40x+ LTM earnings) to generate forward IRRs over 15% (my target equity return).
Conclusion
While Duolingo is an excellent business and one of the highest-quality consumer subscription businesses available on the public markets, the current valuation does not present an attractive risk-reward profile. I remain a patient holder of Duolingo (after all, great management teams like Duolingo tend to surprise to the upside), but I am looking for a 20-30% contraction in multiple to consider adding to my position.