This Magnificent Artificial Intelligence (AI) Stock Is Down 26%. Buy the Dip, Or Run for the Hills?

Key Points

• Duolingo operates the world's most popular digital language education platform, and its stock soared to a new record high in May.

• The stock has since declined by 26%, despite Duolingo's strong financial results, which show rapid growth at the top and bottom line.

• Duolingo's valuation looks a little stretched by two popular metrics, which might explain its fading stock price.

• 10 stocks we like better than Duolingo ›

Duolingo (NASDAQ: DUOL) operates the world's most popular digital language education platform, and the company continues to deliver stellar financial results. Duolingo is elevating the learning experience with artificial intelligence (AI), which is also unlocking new revenue streams that could fuel its next phase of growth.

Duolingo stock set a new record high in May, but it has since declined by 26%. It's trading at a sky-high valuation, so investors might be wondering whether the company's rapid growth warrants paying a premium. With that in mind, is the dip a buying opportunity, or should investors completely avoid the stock?

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Image source: Getty Images.

AI is creating new opportunities for Duolingo

Duolingo's mobile-first, gamified approach to language education is attracting hordes of eager learners. During the first quarter of 2025 (ended March 31), the platform had 130.2 million monthly active users, which was a 33% jump from the year-ago period. However, the number of users paying a monthly subscription grew at an even faster pace, thanks partly to AI.

Duolingo makes money in two ways. It sells advertising slots to businesses and then shows those ads to its free users, and it also offers a monthly subscription option for users who want access to additional features to accelerate their learning experience. The number of users paying a subscription soared by 40% to a record 10.3 million during the first quarter.

Duolingo's Max subscription plan continues to be a big driver of new paying users. It includes three AI-powered features: Roleplay, Explain My Answer, and Videocall. Roleplay uses an AI chatbot interface to help users practice their conversational skills, whereas Explain My Answer offers personalized feedback to users based on their mistakes in each lesson. Videocall, which is the newest addition to the Max plan, features a digital avatar named Lily, which helps users practice their speaking skills.

Duolingo Max was launched just two years ago in 2023, and it's the company's most expensive plan, yet it already accounts for 7% of the platform's total subscriber base. It brings Duolingo a step closer to achieving its long-term goal of delivering a digital learning experience that rivals that of a human tutor.

Duolingo's revenue and earnings are soaring

Duolingo delivered $230.7 million in revenue during the first quarter of 2025, which represented 38% growth from the year-ago period. It was above the high end of the company's forecast ($223.5 million), which drove management to increase its full-year guidance for 2025. Duolingo is now expected to deliver as much as $996 million in revenue, compared to $978.5 million as of the last forecast. But there is another positive story unfolding at the bottom line.

Duolingo generated $35.1 million in GAAP (generally accepted accounting principles) net income during the first quarter, which was a 30% increase year over year. However, the company's adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) soared by 43% to $62.8 million. This is management's preferred measure of profitability because it excludes one-off and non-cash expenses, so it's a better indicator of how much actual money the business is generating.

A combination of Duolingo's rapid revenue growth and prudent expense management is driving the company's surging profits, and this trend might be key to further upside in its stock from here.

Duolingo stock is trading at a sky-high valuation

Based on Duolingo's trailing 12-month earnings per share (EPS), its stock is trading at a price-to-earnings (P/E) ratio of 193.1. That is an eye-popping valuation considering the S&P 500 is sitting at a P/E ratio of 24.1 as of this writing. In other words, Duolingo stock is a whopping eight times more expensive than the benchmark index.

The stock looks more attractive if we value it based on the company's future potential earnings, though. If we look ahead to 2026, the stock is trading at a forward P/E ratio of 48.8 based on Wall Street's consensus EPS estimate (provided by Yahoo! Finance) for that year. It's still expensive, but slightly more reasonable.

Data by YCharts.

Even if we set Duolingo's earnings aside and value its stock based on its revenue, it still looks quite expensive. It's trading at a price-to-sales (P/S) ratio of 22.9, which is a 40% premium to its average of 16.3 dating back to when it went public in 2021.

Data by YCharts.

With all of that in mind, Duolingo stock probably isn't a great buy for investors who are looking for positive returns in the next 12 months or so. However, the company will grow into its valuation over time if its revenue and earnings continue to increase at around the current pace, so the stock could be a solid buy for investors who are willing to hold onto it for the long term. A time horizon of five years (or more) will maximize the chances of earning a positive return.

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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool recommends Duolingo. The Motley Fool has a disclosure policy.