This Magnificent Artificial Intelligence (AI) Stock Is Down 26%. Buy the Dip, Or Run for the Hills?
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Duolingo (DUOL 1. 09%) operates the world's most digital language education platform, and the company continues to der stellar financial results. Duolingo is elevating the learning experience with artificial intelligence (AI), which...
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July 8, 2025
04:22 AM
The Motley Fool
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Duolingo (DUOL 1. 09%) operates the world's most digital language education platform, and the company continues to der stellar financial results
Duolingo is elevating the learning experience with artificial intelligence (AI), which is also unlocking new revenue s that could fuel its next phase of growth
Duolingo stock set a new record high in May, but it has since declined by 26%
It's trading at a sky-high valuation, so investors might be wondering whether the company's rapid growth warrants paying a premium
With that in mind, is the dip a buying opportunity, or should investors completely avoid the stock
Image source: Getty Images
AI is creating new opportunities for Duolingo Duolingo's mobile-first, gamified apach to language education is attracting hordes of eager learners
During the first quarter of 2025 ( March 31), the platform had 130. 2 million monthly active users, which was a 33% jump from the year-ago period
However, the number of users paying a monthly subscription grew at an even faster pace, thanks partly to AI
Duolingo makes money in two ways
It sells advertising slots to es and then shows those ads to its free users, and it also offers a monthly subscription option for users who want access to additional features to accelerate their learning experience
The number of users paying a subscription soared by 40% to a record 10. 3 million during the first quarter
Duolingo's Max subscription plan continues to be a big driver of new paying users
It includes three AI-powered features: Roleplay, Explain My Answer, and call
Roleplay uses an AI chatbot interface to help users practice their conversational skills, whereas Explain My Answer offers personalized back to users based on their mistakes in each lesson
Call, which is the newest addition to the Max plan, features a digital avatar named Lily, which helps users practice their speaking skills
Duolingo Max was launched just two years ago in 2023, and it's the company's most expensive plan, yet it already accounts for 7% of the platform's total r base
It brings Duolingo a step closer to achieving its long-term goal of dering a digital learning experience that rivals that of a human tutor
Duolingo's revenue and earnings are soaring Duolingo dered $230. 7 million in revenue during the first quarter of 2025, which represented 38% growth from the year-ago period
It was above the high end of the company's forecast ($223. 5 million), which drove management to increase its full-year guidance for 2025
Duolingo is now expected to der as much as $996 million in revenue, compared to $978. 5 million as of the last forecast
But there is another positive story unfolding at the bottom line
Duolingo generated $35. 1 million in GAAP (generally accepted accounting principles) net income during the first quarter, which was a 30% increase year over year
However, the company's adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) soared by 43% to $62
This is management's preferred measure of fitability because it excludes one-off and non-cash expenses, so it's a better indicator of how much actual money the is generating
A combination of Duolingo's rapid revenue growth and prudent expense management is driving the company's surging fits, and this trend might be key to further upside in its stock from here
Duolingo stock is trading at a sky-high valuation Based on Duolingo's trailing 12-month earnings per (EPS), its stock is trading at a price-to-earnings (P/E) ratio of 193
That is an eye-popping valuation considering the S&P 500 is sitting at a P/E ratio of 24. 1 as of this writing
In other words, Duolingo stock is a whopping eight times more expensive than the benchmark index
The stock looks more attractive if we value it based on the company's future potential earnings, though
If we look ahead to 2026, the stock is trading at a forward P/E ratio of 48. 8 based on Wall Street's consensus EPS estimate (vided by Yahoo
Finance) for that year
It's still expensive, but slightly more reasonable
Even if we set Duolingo's earnings aside and value its stock based on its revenue, it still looks quite expensive
It's trading at a price-to-sales (P/S) ratio of 22. 9, which is a 40% premium to its average of 16. 3 dating back to when it went public in 2021
With all of that in mind, Duolingo stock bably isn't a great buy for investors who are looking for positive returns in the next 12 months or so
However, the company will grow into its valuation over time if its revenue and earnings continue to increase at around the current pace, so the stock could be a solid buy for investors who are willing to hold onto it for the long term
A time horizon of five years (or more) will maximize the chances of earning a positive return
Anthony Di Pizio has no position in any of the stocks mentioned
The Motley Fool recommends Duolingo
The Motley Fool has a disclosure policy.
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