Free Preview
The language learning provider's selloff is an opportunity for investors.
Duolingo (Nasdaq: DUOL), the language-learning software provider, has been one of the best-performers on our 7investing scorecard. When its shares peaked at nearly $550 earlier this summer, all four of our official recommendations were displaying multibagger returns for our scorecard.
The momentum appeared likely to continue in early August, after the company reported 40%+ revenue and bookings growth its second quarter and then raised its full-year guidance.
Yet the stock has curiously been selling off since then, for a variety of reasons.
For one, its valuation was getting stretched to the extreme. At its peak, Duolingo was priced at 250x trailing earnings and 85x trailing free cash flow. Those stratospheric multiples also imply stratospheric expectations, which almost certainly come falling back down to earth.
The Bears Win the Battle
Almost on-cue, headlines began to emerge that questioned the sustainability of Duolingo’s future. Concerns about innovation at Google Translate and at ChatGPT-5 suggested that the company might lose share to its deeper-pocketed competitors. Others wondered whether Duolingo’s business — which revolves around a gamified app — was too simple to justify a $25 billion market capitalization.
The pendulum began to swing the other way. Duolingo’s stock price got cut in half, today selling for $270/share and with a market cap of $12.5 billion.
But the Bulls Will Win the War?
I am taking advantage of this selloff and recently upgraded 7investing’s conviction in Duolingo from Buy to Strong Buy.
I definitely hear the concerns about Google Translate potentially taking share. Yet these are also the same concerns that the headlines suggested about GPT4 last summer and then again about GPT-5 this summer. In both cases, Duolingo went on to beat expectations and to raise its full year guidance.
There’s nothing wrong with recognizing potential threats that are worth monitoring. But they remain theoretical in nature until we actually see them impacting the execution.
Furthermore, Duolingo’s founder and CEO Luis von Ahn is a special type of leader. He’s an AI first innovator and the godfather of crowdsourcing, who embraces AI and massive amounts of data to make the most optimal business decisions. Duolingo’s AI capabilities are built upon GPT, so AI innovation is much more of an opportunity for Duolingo than it is a threat.
The cherry on top is the valuation. I recently updated my Discounted Cash Flow valuation model with several assumptions of how the company will continue to grow through 2039.
Ultimately, I estimated a fair value for Duolingo is $338 per share, which represents a 24% premium to where the stock is trading today.
The 7investing Key Takeaway
Duolingo is a mission-driven company whose innovative leader has executed well in a massive addressable market.
Although it is temporarily out of favor with Wall Street (which could continue for quite some time), I believe its current price of $275 is a good opportunity for patient investors to buy more shares.
