Is Duolingo stock a buy?

Shares of the online education giant Duolingo (DOUBLE 0.41%) has delivered incredible returns to investors over the past year. Last August, the stock was at a 52-week low of $121.89. Since then, the stock hit a 52-week high of $251.30 in May, but has fallen with the recent stock market selloff.

Now, the stock price is rising once again thanks to a stellar second quarter earnings report. The company’s second-quarter revenue rose 41% year-over-year to $178.3 million, and that’s just the beginning of its many successes in the quarter.

With the stock price on the rise, it begs the question: Is Duolingo stock a worthwhile long-term investment, and if so, is now the time to buy? Here’s a look at the education company to arrive at an answer.

Factors that determine Duolingo’s successful business model

Duolingo is best known as an online language learning app, although it now offers courses in other subjects. The company offers the opportunity to learn more than 40 foreign languages ​​for free, and this model is a key factor in its success.

Because its lessons cost nothing, Duolingo is able to attract consumers to try its services, allowing it to build a substantial user base over the years. At the end of Q2, Duolingo’s daily active users (DAUs) reached 34.1 million, a 59% increase from 2023.

Like many online businesses, the company generates revenue by serving ads to its massive user base. However, most of its revenue comes from subscribers, another key to its success. Duolingo uses a freemium pricing strategy where users can opt out of ads by paying a subscription fee.

In Q2, eight million users opted for a subscription. While that number is a fraction of Duolingo’s audience, subscribers contributed $143.9 million of the company’s $178.3 million in Q2 revenue.

Duolingo strategies to drive growth

Clearly, subscription revenue is critical to the company’s success, so Duolingo has plans to keep subscription revenue growing. A key tactic is the introduction of a higher-priced subscription tier called Duolingo Max.

What makes this Max level an appealing option is the use of artificial intelligence. This level uses unique AI-based features, including the ability to practice conversations in the language you’re learning with Duolingo’s AI.

The Max level was launched in a limited number of English-speaking countries in 2023 and, after proving successful, is now being rolled out widely. At the end of Q2, Max’s availability was up to 27 countries and covered 15% of DAU.

Duolingo expects Max to be available in most countries by the end of the year. The firm didn’t share revenue from Max, but according to CEO Luis von Ahn, as a result of the wider rollout, “This will allow us to more fully see the impact of Max in 2025.”

Along with its Max tier, Duolingo plans to increase revenue by continuing to increase DAU. The firm implements new socially oriented product attributes to keep consumers coming back.

One example is the “Friend streak” feature, which encourages friends to see how many days they can keep each other practicing on Duolingo. These types of improvements helped the company grow DAU by 59% year-over-year in the second quarter.

The company has also developed a successful marketing playbook that uses social media, brand partnerships and other tactics to attract users. This playbook was tested in Japan and helped boost the country’s Q2 DAUs by 93% year-over-year. Duolingo is now replicating the approach in other countries.

To buy or not to buy Duolingo shares

The success of Duolingo’s strategies is seen in its ability to grow double-digit sales annually since going public in 2021.

Data by YCharts.

The company expects its sales to continue this growth trajectory in Q3. Duolingo management expects Q3 revenue to reach at least $186.7 million, representing double-digit growth compared to 2023’s $137.6 million.

This top-line growth, in turn, has allowed Duolingo to deliver strong financials. Q2 net income increased to $24.4 million from $3.7 million in the prior year. Its free cash flow in Q2 rose 60% year-over-year to $54.9 million.

Additionally, Duolingo’s Q2 balance sheet was outstanding. Its assets totaled $1.1 billion, against total liabilities of $372.5 million. And of those liabilities, $291.5 million represented deferred revenue that will ultimately be recognized as income.

Given the company’s strong Q2 results, it’s no surprise that the consensus among Wall Street analysts is an Overweight rating with a median price target of $240.50 on Duolingo stock. This indicates Wall Street’s belief that Duolingo stock has an edge.

With its new AI-powered Max subscription and DAU growth strategies, positioning the company for further revenue growth, and given its outstanding financial health, Duolingo is an attractive long-term investment.

As its share price is hovering around $200 at the time of writing, for the time being it is worth keeping the stock on your watch list and waiting for a drop in price before buying shares.