The first half of 2025 has been a topsy-turvy period for the overall stock market. Rising profits driven by the artificial intelligence (AI) revolution have pushed the market up, while fear of an escalating trade war keeps pulling it back down. When the market opened on June 9, the benchmark S&P 500 index was up by just 2% from where it started the year.
As an education platform that lives on our smartphones, Duolingo (DUOL +0.96%) doesn't have to pay taxes on imported goods. Knowing this, markets have pushed the stock up by a whopping 53% in 2025.
Savvy investors know that high-flying stocks have a dangerous tendency to come crashing back down. To see why Duolingo stock could keep soaring, let's look at what's been driving it higher.
Image source: Getty Images.
Accelerating profits
Duolingo's free-to-use education app grew daily active users by 49% year over year to reach 46.6 million during the first three months of 2025. That is a lot of daily users for a company that employed just 830 people at the end of 2024.
Duolingo isn't the first language education application to gain lots of popularity, but it's the first I've seen that consistently grows sales faster than marketing expenses. First-quarter revenue grew 38% year over year to $231 million. Over the same time frame, sales and marketing expenses rose just 34% to a reasonable $26.7 million.
In the first quarter, total operating expenses rose just 33% year over year to $140 million. With its top line growing faster than expenses, first-quarter operating income surged 44% year over year to $23.6 million.
DUOL Revenue (Quarterly) data by YCharts
Duolingo's operating profit margin rose to 10.2% in the first quarter and could expand much further. It isn't unusual to see software subscription businesses with few employees and asset-light business models boast of operating margins above 20%, such as Veeva Systems. Some software businesses, like Adobe, regularly report operating margins above 30%.
Now that Duolingo has an enormous base of more than 10 million paying subscribers, it's not unreasonable to expect rapidly expanding profits over the next few years.
The AI tools driving growth
Duolingo's most expensive subscription tier, called Max, offers some unique AI driven features that could keep its growing subscriber base locked in for the long run. The flagship video call feature allows learners to chat out loud with a bot named Lily. Soon, subscribers to the top tier will be able to review past conversations and receive voice messages from Lily.
Video calls could do a lot to expand Duolingo's user base to folks who are not attracted to its gamified learning approach. It's anecdotal, but I would like to practice the foreign language I already speak fluently when I'm not in the target language country. Duolingo's gamified lessons make me nauseous, but I'd still consider a Max subscription if my target language, Thai, were available.
In addition to video calls with Lily, Duolingo Max subscribers also have access to the company's Explain My Answer feature, which provides personalized feedback to answers they provide during lessons, whether the answers were right or wrong. Max subscribers also get to roleplay real-world conversations, such as ordering coffee in Paris.
Why it's not too late
At a glance, Duolingo shares appear wildly overvalued at a recent price of 249 times trailing 12-month earnings. I'm going to go out on a limb and suggest the stock is still at a reasonable valuation once you consider the potential pace of earnings growth over the next few years.
DUOL PEG Ratio (Forward) data by YCharts
Duolingo stock appears undervalued if we look at its forward price-to-earnings-growth or PEG ratio. This metric divides the trailing PE ratio by the rate of earnings-per-share growth expected by Wall Street in the year ahead. With a recent forward PEG ratio of 0.38, this stock's seemingly high valuation is more than justified by projected earnings growth.
Before plowing more of your available cash into Duolingo stock, it's important to remember that expectations are sky high. If management puts out a quarterly earnings report that mildly suggests earnings growth could decelerate, investors who buy at recent prices could suffer swift and heavy losses. If you can't handle this high degree of risk, it's best to wait for a more attractive entry point.
