Duolingo, Inc. (NASDAQ:DUOL) Looks Just Right With A 44% Price Jump

Duolingo, Inc. (NASDAQ:DUOL) shareholders would be excited to see that the share price has had a great month, posting a 44% gain and recovering from prior weakness. The annual gain comes to 103% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, when almost half of the companies in the United States' Consumer Services industry have price-to-sales ratios (or "P/S") below 1.6x, you may consider Duolingo as a stock not worth researching with its 27.2x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Our free stock report includes 2 warning signs investors should be aware of before investing in Duolingo. Read for free now.

See our latest analysis for Duolingo

How Duolingo Has Been Performing

Duolingo certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Duolingo will help you uncover what's on the horizon.

How Is Duolingo's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Duolingo's is when the company's growth is on track to outshine the industry decidedly.

If we review the last year of revenue growth, the company posted a terrific increase of 39%. Pleasingly, revenue has also lifted 193% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 31% during the coming year according to the analysts following the company. With the industry only predicted to deliver 13%, the company is positioned for a stronger revenue result.

With this information, we can see why Duolingo is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What Does Duolingo's P/S Mean For Investors?

The strong share price surge has lead to Duolingo's P/S soaring as well. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Duolingo maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Consumer Services industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Having said that, be aware Duolingo is showing 2 warning signs in our investment analysis, you should know about.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.