Should You Buy Duolingo Now?
Hi Multis
Brent here. It's been a while since I wrote an update, but I'm still here. We will look at Duolingo's (DUOL) Q4 2024 earnings, and then Kris will take over for the Quality Score and Valuation Score, and decide if the stock is a buy or not. But let's first look at the earnings the company posted in Q4.
The Results
Revenue came in at $209.6M, a 39% YoY increase driven primarily by robust subscriber growth and product innovation, especially Duolingo Max. If you look deeper, you'll see some quiet signals that show just how strong the company is.
However, the stock dropped over 15% after its earnings release.
The reason? Duolingo had a margin decline due to higher GenAI costs linked to Duolingo Max adoption. The gross margin declined from 73.1% to 71.9% for Q4 2024 compared to Q4 2023 and by 50 basis points for the full year 2024 compared to 2023.
Keep in mind that these AI investments have been really good for Duolingo in the past, and that their early move into the AI space has been a huge part of what has driven the stock gains in the past. Duolingo might see some more gross margin pressure in the next 2-3 quarters due to these roll-outs.
Duolingo makes these investments, which might hurt the stock a bit in the short term but give it huge potential upside for the long term.
In addition, if we take a look at Duolingo’s performance year-to-date, it isn’t even that bad. Duolingo is up 0.6% year-to-date compared to the S&P 500, which is down 10.3% so far.
Core User Metrics
As many of you know, the core strength of Duolingo is its app engagement and the overall high quality of even the free product, and that story keeps getting better every day. As usual, we look at DAUs (daily active users), MAUs (monthly active users) and paid subscribers.
DAUs: 40.5M (+51% YoY)
MAUs: 116.7M (+32% YoY)
Paid Subscribers: 9.5M (+43% YoY)
Duolingo Q4 Shareholder Letter
DAUs expanding at a greater rate than MAUs is an indication of improvement in stickiness. The ratio of DAUs to MAUs hit 34.7%, quite a bit better than the 30.7% last year. That's high for a consumer application. Over 10 M+ users now have streaks lasting more than 1 year.
I recently became one of the users with a 1-year+ streak. (Kris has a streak of almost three years.) My Duolingo journey as a user started when I first started writing about the company for Potential Multibaggers. These impressive numbers show that Duolingo is capable of translating its gamified UX into excellent retention.
Financials
Revenue grew 39% YoY to $209.6M for Q4, and total bookings were up 42% to $ 271.6 M. Subscription revenue (83% of total) was the natural growth driver, up 48% YoY to $ 174.3 M. Other revenue, like ads, the English Test, and the in-app purchases, only increased by 5%.
Net income was $13.9M, up 15% YoY
Adjusted EBITDA: $52.3M (margin of 25%, up from 23.3% in 2023)
Free cash flow: $87.8M, with an impressive 41.9% FCF margin, up from 31.6%.
Margins expanded all around. Adjusted EBITDA margin expanded 170 bps year-over-year. These are high-quality earnings driven by operating leverage, not just topline growth.
Monetization
Duolingo Max, the company's AI-facilitated paid product, currently accounts for 5% of paid members and is already outperforming internal projections. It is anchored around the new Video Call feature, which is an AI-driven dialog. Learners of English are leveraging it significantly more than other learners, which helps monetization across the biggest TAM (total addressable market). English language learning continues to account for less than 50% of Duolingo's revenue compared to 80% of the total market.
One of the other AI tools is slowly being rolled out. Lily (Duolingo's AI tutor) has the potential to replicate real-time chat with adaptive answers, which could be revolutionary in the language learning space. Think personal tutor, but in your pocket, and for a fraction of the cost.
Duolingo Blog
Operational Leverage
One of Duolingo's strengths is operational efficiency:
Research and Development: Down to 31% of revenue (GAAP), from 37% in FY23
Sales & Marketing: Decreased from 14% to 12% of revenue in FY24
General & Administrative: Decreased from 25% to 21% in FY24
All these reductions occurred while user metrics and revenue growth skyrocketed. Good. AI and automation were cited as key solutions in these areas, powering lesson creation at scale and keeping costs low.
Stock-based compensation remains a major line item ($120.3M in FY2024), but ~15% of it is still earmarked for long-term founder grants that will expire in 2031.
Brand and Marketing:
Duolingo has further strengthened its brand in 2024; they are becoming real kings at playing the marketing game. In 2024 alone, they placed a 5-second Super Bowl ad, a Netflix tie-in called "Owl Game," and even a traveling skating spectacle called "Duolingo on Ice." It's absurd, but it works so well that AdAge named Duolingo "Marketer of the Year."
Also, on social media, they are growing well. YouTube Shorts and Instagram Reels views grew 430% and 450% YoY, respectively.
Guidance for 2025
Management guided for:
FY25 Revenue: $962.5M–$978.5M (+29%–31% YoY)
FY25 Bookings: $1.082B–$1.098B (+24%–26%)
FY25 Adj. EBITDA: $259.9M–$274.0M (margin: 27%–28%)
Another strong guidance.
Conclusion: Still the Category King
Duolingo keeps combining strong user growth, solid monetization, fast growth and increasing profitability. It's rare to see a company do so well on all fronts.
Video Call, AI teachers, streak-based activity, viral marketing, and organic word-of-mouth put Duolingo in its own category if the company is able to continue scaling Max and adds more categories like the company did with Math and Music.
This was another strong quarter, up to the next!
And to Kris.
Hi Multis (from Kris this time)
Of course, you want to know if Duolingo is a buy. I wonder as well. Let's see.
Duolingo's Quality Score
Personal conviction: 9/10 (unchanged)
Profitability: 8.5/10 (unchanged)
Duolingo remains profitable on a GAAP net income basis.
Sales efficiency: 10/10 (unchanged)
The sales efficiency remains at 20/10 but, of course, we don't go above 10/10.
Innovation: 4.5/5 (up from 3.5/5)
I always wanted Duolingo to expand into other categories. Now that music and math are rolled out globally, and Duolingo implements AI in an impressive way, I feel that an upgrade of the innovation score is warranted.
Must-have?: 3.5/5 (unchanged)
Revenue growth: 5/5 (unchanged)
Durability of growth: 9/10 (up from 8.5/10)
With the expansion of categories and the AI integration, I think there's a longer pathway for growth, so I upgrade this score as well.
Management quality: 9/10 (unchanged)
Insiders' ownership: 5/5 (unchanged)
Multibagger potential now: 3.5/5 (unchanged)
TAM & SAM: 4/5 (unchanged)
Financial Strength: 10/10 (unchanged)
Risk (negative): 2/5 (unchanged)
Competition (negative): 2/5 (unchanged)
Dilution (negative): 3.5/5 (up from 3/5)
Dilution remains high, and I give an extra (negative) half point because of that.
Scale advantages shared (-5/+5): 5 (up from 4)
Again, with the implementation of AI and the expansion of categories, the scale advantages shared become bigger for Duolingo, so I upgrade the score.
Conclusion Quality Score
Duolingo's Quality Score jumps from 76.5 to 79, which makes it even higher quality than it already was.
But how about the valuation? Let's check that.
Valuation Score
While Duolingo is profitable, it's way too early to value it on a PE basis.