Shares of Duolingo (DUOL -0.86%) shot up over 30% this week, according to data from S&P Global Market Intelligence. The language learning and education app saw rapid user and revenue growth yet again in the fourth quarter, leading investors to buy up the stock. Shares of the stock hit an all-time high and now sit at a market cap of $10 billion.
Here’s why Duolingo stock soared more than 30% this week.
Growing users, expanding monetization
This week, Duolingo released its financial results for the last three months of 2023. The gamified language learning app continues to see rapid growth around the world. Daily active users (DAUs) grew 65% year over year to 26.9 million, leading to paid subscribers growing 57% year over year to 6.6 million.
Financially, more subscribers equate to more revenue. Duolingo’s revenue grew 45% in Q4, hitting $151 million in the period. The company is also seeing accelerated growth from add-on purchases, which grew 94% in 2023 to $34.7 million. Duolingo is highly profitable, generating $47.7 million in free cash flow in Q4 for a margin of 31.6%. Hypergrowth while maintaining profitability is a rare feat. This combination is likely why Duolingo stock soared to all-time highs this week.
Is the stock a buy today?
The Duolingo business is firing on all cylinders, with revenue and earnings both compounding higher. More and more people are turning to the application for foreign-language learning. Management is also making a big push into advanced English classes and mathematics with a focus on children. It is hard to have any complaints about Duolingo’s business at the moment; its execution has been incredible.
And yet, it is also hard to see how the stock is a buy at these prices. At a market cap of $10 billion, Duolingo trades at around 70x its 2023 free-cash-flow numbers. A typical growth stock will trade at a premium earnings multiple of 25x to 35x, with anything above that a nosebleed multiple. Even if Duolingo doubles its cash flow, it will still trade at the higher end of the average growth stock. This means a lot of future earnings growth is already priced into the stock.
Investors are excited about Duolingo. But with this excitement comes high expectations. Perhaps too high. For this reason, smart investors should be cautious about buying Duolingo stock after its recent earnings pop.
Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Duolingo. The Motley Fool has a disclosure policy.
