Market Participants Recognise Duolingo, Inc.'s (NASDAQ:DUOL) Revenues

When close to half the companies in the Consumer Services industry in the United States have price-to-sales ratios (or "P/S") below 1.4x, you may consider Duolingo, Inc. (NASDAQ:DUOL) as a stock to avoid entirely with its 16.6x 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.

Check out our latest analysis for Duolingo

How Duolingo Has Been Performing

With revenue growth that's superior to most other companies of late, Duolingo has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Keen to find out how analysts think Duolingo's future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Duolingo would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered an exceptional 43% gain to the company's top line. Pleasingly, revenue has also lifted 199% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 36% as estimated by the twelve analysts watching the company. With the industry only predicted to deliver 14%, the company is positioned for a stronger revenue result.

In light of this, it's understandable that Duolingo's P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

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

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Duolingo's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Duolingo that you need to be mindful of.

If you're unsure about the strength of Duolingo's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.