If You Invested $2,000 in Duolingo in 2021, This Is How Much You Would Have Today

Duolingo (DUOL 3.64%), a developer of learning apps and language certification tests, went public on July 28, 2021, at $102 per share. The stock opened at $141.40 on the first day and rallied to an all-time high of $202.69 on Sept. 23, 2021.

Today, Duolingo's stock trades at about $160. The bulls retreated as its growth cooled in a post-pandemic market and rising interest rates compressed its valuations. Nevertheless, a $2,000 investment in its initial public offering would still have grown to over $3,100. Let's see why Duolingo has held up better than many other pandemic-era growth stocks.

Image source: Getty Images.

What does Duolingo do?

Duolingo carved out a niche in the online language learning market with a simple app that gamified the experience with gems and rewards. That disruptive approach made it the most downloaded online learning app in the world.

Duolingo now offers online courses in more than 40 languages, an English proficiency test, as well as newer apps for learning phonics, math, and music. It monetizes its free users with ads and provides an ad-free experience with extra perks for its paid subscribers. It provides its online English proficiency test as an a la carte service.

Why did Duolingo impress the bulls?

Duolingo experienced a major growth spurt as people took more online language classes during the pandemic. It faced tough year-over-year comparisons as the pandemic passed, but it still grew like a weed over the past two and a half years.

Data source: Duolingo. YOY = year over year. 

In the second quarter of 2023, Duolingo's monthly active users (MAUs) grew 50% year over year to 74.1 million, its daily active users (DAUs) rose 62% to 21.4 million, and its total number of paid subscribers jumped 59% to 5.2 million -- which gave it a subscriber penetration rate (as a percentage of its MAUs) of 7.9%.

Since the end of 2020, Duolingo has more than doubled its MAUs, nearly tripled its DAUs, and more than tripled its paid subscribers. That explosive growth suggests that Duolingo is disrupting traditional language learning programs.

Duolingo expects its bookings to grow 33%-34% this year. Analysts expect its revenue to rise 40% in 2023 and grow another 28% to $657 million in 2024.

Can Duolingo generate consistent profits?

Duolingo wasn't profitable on a generally accepted accounting principles (GAAP) basis when it went public, and its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin turned negative in 2021. But its adjusted EBITDA margin turned positive again over the past two years and it posted a GAAP profit in its latest quarter.

Data source: Duolingo.

Duolingo expects to post an adjusted EBITDA margin of 14%-15% for the full year, while analysts expect that figure to expand to 18% in 2024. They also expect it to turn profitable on a GAAP basis in 2024 with a slim net profit of $3.9 million.

We should take those estimates with a grain of salt, but they suggest economies of scale are kicking in for Duolingo as it gains more users and converts more of them into paid subscribers. Its use of generative AI to produce more content could also enable it to scale up its business more efficiently while reducing its operating expenses.

But will Duolingo revisit its all-time highs anytime soon?

With an enterprise value of $5.9 billion, Duolingo trades at 12 times this year's sales and 78 times its adjusted EBITDA. Those high valuations suggest that a lot of optimism has already been baked into its stock price.

By comparison, the more diversified online education company Coursera -- which is growing slower than Duolingo and has a negative adjusted EBITDA margin -- trades at just 3 times this year's sales. The online education and tutoring services provider Chegg -- which is suffering a major slowdown as generative AI platforms threaten to disrupt its business model -- trades at just 1 times this year's sales and 4 times its adjusted EBITDA.

The bulls seem willing to pay a premium for Duolingo because it's growing faster and isn't exposed to the macro headwinds, declining college enrollment rates, or generative AI threats that are challenging many of its industry peers. Nevertheless, its valuations could limit its upside potential as long as interest rates stay elevated.

I believe Duolingo is still a great hypergrowth stock, but it probably won't revisit its all-time highs by the end of 2023. Investors can accumulate some more shares at these levels, but they'll need to brace for a lot of volatility, tune out the near-term noise, and focus on its long-term growth potential in the language learning space.