Duolingo (DUOL)

Language-learning app Duolingo (NASDAQ:DUOL) reported revenue ahead of Wall Street’s expectations in Q1 CY2025, with sales up 37.7% year on year to $230.7 million. Guidance for next quarter’s revenue was optimistic at $240 million at the midpoint, 2.6% above analysts’ estimates. Its GAAP profit of $0.72 per share was 39.3% above analysts’ consensus estimates.

Company Overview

Founded by a Carnegie Mellon computer science professor and his Ph.D. student, Duolingo (NASDAQ:DUOL) is a mobile app helping people learn new languages.

Consumers today expect goods and services to be hyper-personalized and on demand. Whether it be what music they listen to, what movie they watch, or even finding a date, online consumer businesses are expected to delight their customers with simple user interfaces that magically fulfill demand. Subscription models have further increased usage and stickiness of many online consumer services.

Competitors offering language-learning services include Coursera (NYSE:COUR) and private companies Rosetta Stone, Babbel, Busuu, and Lingvist.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last three years, Duolingo grew its sales at an incredible 43.1% compounded annual growth rate. Its growth surpassed the average consumer internet company and shows its offerings resonate with customers, a great starting point for our analysis.

This quarter, Duolingo reported wonderful year-on-year revenue growth of 37.7%, and its $230.7 million of revenue exceeded Wall Street’s estimates by 3.4%. Company management is currently guiding for a 34.6% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 27.6% over the next 12 months, a deceleration versus the last three years. Still, this projection is admirable and suggests the market is baking in success for its products and services.

User Growth

As a subscription-based app, Duolingo generates revenue growth by expanding both its subscriber base and the amount each subscriber spends over time.

Over the last two years, Duolingo’s monthly active users, a key performance metric for the company, increased by 39.8% annually to 130.2 million in the latest quarter. This growth rate is among the fastest of any consumer internet business and indicates its offerings have significant traction.

In Q1, Duolingo added 32.6 million monthly active users, leading to 33.4% year-on-year growth. The quarterly print was lower than its two-year result, suggesting its new initiatives aren’t accelerating user growth just yet.

Revenue Per User

Average revenue per user (ARPU) is a critical metric to track because it measures how much the average user spends. ARPU is also a key indicator of how valuable its users are (and can be over time).

Duolingo’s ARPU growth has been subpar over the last two years, averaging 1.6%. This isn’t great, but the increase in monthly active users is more relevant for assessing long-term business potential. We’ll monitor the situation closely; if Duolingo tries boosting ARPU by taking a more aggressive approach to monetization, it’s unclear whether users can continue growing at the current pace.

This quarter, Duolingo’s ARPU clocked in at $1.77. It grew by 3.2% year on year, slower than its user growth.

A company’s gross profit margin has a significant impact on its ability to exert pricing power, develop new products, and invest in marketing. These factors can determine the winner in a competitive market.

For internet subscription businesses like Duolingo, gross profit tells us how much money the company gets to keep after covering the base cost of its products and services, which typically include customer service, data center and infrastructure expenses, royalties, and other content-related costs if the company’s offerings include features such as video or music.

Duolingo has robust unit economics, an output of its asset-lite business model and pricing power. Its margin is better than the broader consumer internet industry and enables the company to fund large investments in new products and marketing during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an excellent 72.7% gross margin over the last two years. Said differently, roughly $72.68 was left to spend on selling, marketing, and R&D for every $100 in revenue.

Duolingo’s gross profit margin came in at 71.1% this quarter, down 1.9 percentage points year on year. Duolingo’s full-year margin has also been trending down over the past 12 months, decreasing by 1 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs.

Unlike enterprise software that’s typically sold by dedicated sales teams, consumer internet businesses like Duolingo grow from a combination of product virality, paid advertisement, and incentives.

Duolingo is extremely efficient at acquiring new users, spending only 16.6% of its gross profit on sales and marketing expenses over the last year. This efficiency indicates that it has a highly differentiated product offering and strong brand reputation, giving Duolingo the freedom to invest its resources into new growth initiatives while maintaining optionality.

EBITDA is a good way of judging operating profitability for consumer internet companies because it excludes various one-time or non-cash expenses (depreciation), providing a more standardized view of the business’s profit potential.

Duolingo has been a well-oiled machine over the last two years. It demonstrated elite profitability for a consumer internet business, boasting an average EBITDA margin of 23.9%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Duolingo’s EBITDA margin rose by 25.3 percentage points over the last few years, as its sales growth gave it immense operating leverage.

This quarter, Duolingo generated an EBITDA profit margin of 27.2%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

We track the change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Duolingo’s full-year EPS flipped from negative to positive over the last three years. This is a good sign and shows it’s at an inflection point.

In Q1, Duolingo reported EPS at $0.72, up from $0.55 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Duolingo’s full-year EPS of $2.00 to grow 56%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Duolingo has shown terrific cash profitability, driven by its lucrative business model and cost-effective customer acquisition strategy that enable it to stay ahead of the competition through investments in new products rather than sales and marketing. The company’s free cash flow margin was among the best in the consumer internet sector, averaging an eye-popping 34.4% over the last two years.

Taking a step back, we can see that Duolingo’s margin expanded by 29.2 percentage points over the last few years. This is encouraging, and we can see it became a less capital-intensive business because its free cash flow profitability rose more than its operating profitability.

Duolingo’s free cash flow clocked in at $103 million in Q1, equivalent to a 44.6% margin. The company’s cash profitability regressed as it was 2.2 percentage points lower than in the same quarter last year, but it’s still above its two-year average. We wouldn’t read too much into this quarter’s decline because investment needs can be seasonal, leading to short-term swings. Long-term trends trump temporary fluctuations.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

Duolingo is a profitable, well-capitalized company with $999.3 million of cash and $54.53 million of debt on its balance sheet. This $944.7 million net cash position is 5.3% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly Duolingo blew past analysts’ EBITDA expectations this quarter. We were also glad its full-year EBITDA guidance exceeded Wall Street’s estimates. Zooming out, we think this was a solid print. The stock traded up 11.6% to $446.40 immediately after reporting.

Updated: June 14, 2025 at 10:24 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Duolingo.

Duolingo is a cream-of-the-crop consumer internet company. First of all, the company’s revenue growth was exceptional over the last three years. And while its ARPU has grown slowly over the last two years, its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits. On top of that, Duolingo’s impressive EBITDA margins show it has a highly efficient business model.

Duolingo’s EV/EBITDA ratio based on the next 12 months is 77.3x. There’s no doubt it’s a bit of a market darling given the lofty multiple, but we don’t mind owning an elite business, even if it’s expensive. Investments like this should be held patiently for at least three to five years as they benefit from the power of long-term compounding, which more than makes up for any short-term price volatility that comes with high valuations.

Wall Street analysts have a consensus one-year price target of $506.14 on the company (compared to the current share price of $479.15).