Is There Opportunity in Duolingo After Shares Fall 38% This Month?

• Wondering if Duolingo is a bargain or overrated? Let’s break down what’s really going on with the stock’s current value.
• The stock has dropped sharply over the past month, falling 38.1%, and has slid 36.8% over the last year. Still, it is boasting a massive 173.9% gain over the past three years.
• Recent headlines have focused on growing competition in the digital learning space and concerns about user engagement trends. Moves in tech sector sentiment also seem to be hitting Duolingo particularly hard, amplifying recent volatility.
• Right now, Duolingo scores a 3 out of 6 on our undervaluation checks, so it is an open question whether investors are underestimating or overestimating its potential. We will dig into some classic and cutting-edge valuation methods next, and at the end, share a new perspective that could reshape how you see Duolingo’s value.

Find out why Duolingo's -36.8% return over the last year is lagging behind its peers.

Approach 1: Duolingo Discounted Cash Flow (DCF) Analysis

The Discounted Cash Flow (DCF) model is a widely used method for valuing a company by estimating its future cash flows and then discounting those amounts back to today’s value. This approach aims to determine the present worth of a business based on projections of how much cash it will generate.

For Duolingo, the company’s current Free Cash Flow stands at $341.57 million. Analysts project substantial growth over the coming decade, with Free Cash Flow expected to reach about $1.20 billion by 2035. While up to five years of forecast data are provided directly by analysts, Simply Wall St extrapolates figures further out and indicates consistent annual growth in cash generation.

Using the 2 Stage Free Cash Flow to Equity model, this methodology produces an intrinsic value of $482.63 per share for Duolingo. When compared to the current market price, this suggests the stock is trading at a 58.3% discount, making it appear significantly undervalued based on projected cash flows.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Duolingo is undervalued by 58.3%. Track this in your watchlist or portfolio, or discover 876 more undervalued stocks based on cash flows.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Duolingo.

Approach 2: Duolingo Price vs Earnings

The Price-to-Earnings (PE) ratio is a widely used metric for valuing profitable companies because it directly connects a company’s market value to its reported earnings. For profitable businesses like Duolingo, this ratio helps investors understand how much the market is willing to pay today for a dollar of earnings, making it a sensible starting point for valuation.

It is important to remember that what counts as a “normal” or “fair” PE ratio depends on factors like a company’s growth prospects and risk profile. High-growth businesses often trade at higher PE ratios, while companies with more stable or uncertain outlooks tend to have lower ratios. Risk-adjusted expectations are key to setting reasonable benchmarks.

Currently, Duolingo trades at a PE ratio of 24.1x. This is just below the average for its peers, which stands at 24.9x, but well above the Consumer Services industry average of 15.9x. However, rather than looking only to peers or industry averages, Simply Wall St provides a “Fair Ratio” for Duolingo, which sits at 13.3x. The Fair Ratio is more comprehensive than a simple comparison, as it considers the company’s expected earnings growth, profitability, business risks, industry factors, and market cap, resulting in a more tailored benchmark.

Comparing Duolingo’s actual PE of 24.1x to its Fair Ratio of 13.3x suggests the stock is trading at a premium to its fundamentals. While this may reflect optimism about future growth, it is notably higher than what would be justified given current growth, profitability, and risk factors.

Result: OVERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1403 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Duolingo Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let's introduce you to Narratives. A Narrative is more than just a number; it is your personal story or perspective about a company, built from what you believe about its future revenue, earnings, and margins, and how these assumptions combine to create your own fair value estimate.

Narratives make valuation accessible by helping you clearly connect a company’s story to a financial forecast, and then directly to a fair value you can compare with today’s price. On the Simply Wall St platform, Narratives are available within the Community page and are used by millions of investors to shape their own buy or sell decisions, making investment strategy more dynamic and collaborative.

What sets Narratives apart is that they update automatically when new data from news or earnings comes in, ensuring your viewpoint always reflects the latest information. For example, some investors see Duolingo’s global expansion and innovative features as strong reasons for a fair value near $600, while others focus on slowing user growth, competition, and margin risks to set their fair value closer to $239. Different Narratives, based on different assumptions, lead to different conclusions, showing there is no single “right” answer, just the story you believe in.

Do you think there's more to the story for Duolingo? Head over to our Community to see what others are saying!

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.

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