Should You Buy Duolingo Stock After Its 14% Dip in February?

Duolingo (NASDAQ: DUOL) operates the world's largest digital language education platform with interactive, gamified lessons offered to almost anybody with a smartphone. The company is leaning heavily on artificial intelligence (AI) to elevate the user experience even further, and it's having an incredible amount of success.

With that said, after recently setting a new record high, Duolingo stock is coming off a rough month in February with a decline of 14%. The sell-off in the broader stock market was one contributing factor, but the company also reported its financial results for 2024 on Feb. 27, and while they were strong, its guidance for 2025 points to slowing revenue growth.

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Should investors treat the recent dip as a buying opportunity?

Image source: Getty Images.

Duolingo is leaning heavily on AI

Duolingo ended 2024 with a record 116.7 million monthly active users (MAUs), which was a 32% increase from the prior-year period. A record 9.5 million of them were paying a monthly subscription, up 43% year over year. The platform uses a freemium business model, so it monetizes most users by showing them ads during their lessons, while a small (but rapidly growing) portion pay a monthly subscription to unlock additional features and accelerate their learning.

AI is playing a key role in converting free users into paying ones. In 2023, Duolingo launched its Max subscription tier, which introduced new AI-powered features, including Explain My Answer and Roleplay. The former provides users with personalized feedback on their mistakes in each lesson, while the latter uses an AI chatbot interface to help users practice their foreign language skills.

Last year, Duolingo expanded the Max offering with a new AI learning tool called Video Call. It features a digital avatar named Lily, who can help users practice their speaking skills in a language of their choice. She is capable of holding conversations on almost any topic, so users can simulate real-world scenarios, which is useful ahead of an international trip, for instance. She even remembers previous interactions to create a highly personalized experience.

The Max tier already represents around 5% of Duolingo's total subscribers, and CEO Luis von Ahn said uptake has been higher than expected. Duolingo's long-term goal is to deliver a learning experience that rivals that of a human tutor, and the AI features within the Max plan are bringing the company one step closer to achieving it.

Rapid revenue growth and soaring profits

Duolingo grew revenue last year 41% to a record $748.0 million. That figure came in above management's forecast of $744.0 million, which it had raised three times throughout the year. But the company anticipates growth will slow to around 30% in 2025 with total revenue of $970.5 million (at the midpoint of the guidance range).

With that said, 30% is still an attractive growth rate, especially when you consider the progress Duolingo has made on the bottom line recently. It generated $88.5 million in net income during 2024, a whopping 451% increase compared to 2023. Operating expenses only increased 20% for the year, allowing much of Duolingo's revenue growth to flow to the bottom line.

In other words, Duolingo can probably afford to spend more aggressively on things like marketing and research and development to fuel revenue, but it has chosen to strike a healthy balance between growth and profitability.

This strategy will make Duolingo's business more sustainable over the long term by reducing the need for further cash injections. Plus, if the company's profits continue growing each year, it may eventually be in a position to return capital to shareholders through dividends and stock buybacks.

Should you buy Duolingo stock on the dip?

Duolingo is a great company with lightning-fast growth across all of its major metrics. However, its stock isn't cheap right now, even after its 14% dip in February. It trades at a price-to-sales (P/S) ratio of 19.7, which is a 27% premium to its long-term average of 15.5 (dating back to when the company went public in 2021):

Data by YCharts.

Duolingo is only recently profitable (it delivered positive earnings for the first time in 2023), so the traditional price-to-earnings (P/E) ratio is less meaningful. But for perspective, its P/E ratio is around 166 right now -- almost 7 times higher than the S&P 500 index.

Of course, you have to account for Duolingo's soaring earnings growth too. Wall Street's consensus estimate (provided by Yahoo!) suggests its earnings per share could soar to $5.78 in 2025, which places its stock at a forward P/E ratio of 54. That is a significantly more reasonable valuation, despite still representing a premium to the S&P 500:

Data by YCharts.

In summary, Duolingo stock is expensive right now, but that doesn't mean it's a bad buy. Investors who buy in today should be willing to hold it for the long term because five or more years from now, its current price could look like an absolute bargain in hindsight.

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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool recommends Duolingo. The Motley Fool has a disclosure policy.