Language-learning expert Duolingo (DUOL 2.33%) has been crushing it on Wall Street lately. The stock is up by 180% since the start of 2023, lifted by a steady stream of analyst-stumping earnings reports.
However, the stock is soaring on some very lofty valuation ratios. Trading at 208 times earnings and 15 times sales, many value-minded investors would give Duolingo one quick glance before backing away slowly.
Is Duolingo's stock a buy today, or are those shares overdue for a price correction? You could make a serious argument both ways, but I know which way I'm leaning. Let's have a look.
Turbulence and volatility
Duolingo's stock chart may point skyward, but it hasn't been a smooth ride so far. The stock fell by 15% or more in January and May 2024. The company more than doubled the average analyst's earnings target in May's first-quarter report, but the market-moving powers that be chose to focus on a moderating top-line growth trend.
This volatility comes with the territory for growth stocks with rich valuations. It ain't easy being a green owl with hypergrowth expectations. Despite these uncomfortable fluctuations, Duolingo continues to prove its value.
Walking the talk
At the same time, Duolingo delivers on its growth promises. Year-over-year sales growth has averaged 45% over the last three years. The company enjoys high user engagement, which often leads to continued revenue growth for subscription-style business models. Duolingo is adding artificial intelligence (AI) tools to its digital learning experience, providing features such as natural-language AI chats and an AI analysis of your mistakes.
Duolingo's business results look strong. Sales are soaring, bottom-line earnings have turned consistently positive in recent quarters, and its cash profits are even richer:
DUOL Revenue (TTM) data by YCharts
Don't forget that Duolingo is addressing a very large global market for online education services. It brings a unique, somewhat whimsical, and user-friendly learning experience to the table, setting it apart from other e-learning platforms. The company already offers math and music classes, and I imagine a much wider course portfolio evolving over time.
Is Duolingo a buy, sell, or hold today?
Every investor is different and your mileage may vary. For me, Duolingo is a cherished long-term investment and I wouldn't hesitate to buy more of the stock in June 2024.
I get it if you can't get past the lofty valuation figures. The current price suggests impressive long-term profits based on current growth trends. That's not the same thing as a proven ability to actually generate significant profits and cash flows.
But Duolingo is already more profitable than most of its growth-stock peers, and many signs point to greater bottom-line gains in the future. The course selection, subscription plans, and learning tools are all undergoing expansion and new ideas. In the words of founder and CEO Luis von Ahn, "We are still in the early stages of our monetization journey, and discovering multiple avenues to enhance bookings."
Considering Duolingo's impressive growth trajectory, robust user engagement, and strategic AI enhancements, the stock looks like a compelling idea for growth-minded investors. It's not every stock buyer's cup of green tea, but Duolingo certainly works for me. I have high hopes for this digital learning stock in the long run.
And you don't even have to feel too guilty about a Duolingo buy as a value investor right now. The stock trades more than 20% below its 52-week highs, so you could argue that it's selling at a discount from a historical point of view.
Now excuse me, I have some Japanese lessons and a 2,916-day learning streak to worry about. Those gamification tweaks really work on some people.
