Duolingo Stock Surges Despite User Concerns over AI Transition — is it a Buy, Sell, or Hold?

    Duolingo (NASDAQ : DUOL) has been a favorite among Wall Street : 164% returns since last year and 34% in the last month, yet much of its user base has expressed staunch disdain over Duolingo following reports that AI will be replacing contract workers for its language learning models. The company is one of the fastest growing companies on Wall Street, and this high growth is priced in : an eye-watering 249 P/E ratio is observed, showing the absolute trust bulls have in the high-growth tech company. Any small slow-down would send stock prices tumbling, leading us to a discussion on whether to buy, sell or hold Duolingo.

    Duolingo primarily makes its money from its subscription services. The platform is free to use for all, but daily usage is limited to 5 mistakes. Users can pay 12.99$ monthly or 59$ annually for its Super service which allows for unlimited mistakes and further access to exercises, while its newer Max service uses AI to formulate user-targeted problems, selling at a price of 29.99$ monthly and 269$ annually. Over 10 million of its 130 million user base are paying subscribers, which bring in over 80% of Duolingo's revenue.

    Duolingo has strong growth prospects. Technology is a high growth sector with strong funding, and Duolingo's earnings growth reflects that, with its Q1 2025 showing growth of 30% and 37% on earnings and revenue respectively compared to their last quarter. The company competes in 40 billion $ valued language learning sector, with it controlling approximately 2% of this sector, with revenue per annum totaling 700 million $ as of its most recent figures. Duolingo faces little to no competition in their sector : the marketing and quality of their products is unbeaten by competitors in part due to their strong social media presence. As of 2023, 80% of their user base was acquired organically, meaning through social media or word of mouth. Their social media team is apparently managed by only 2 members and some contract employees, meaning that 2 team members help bring in over 80% of Duolingo's revenue streams, their users.

    This move was apparently rolled back by CEO Luis von Ahn in May, but AI courses had already hit the platform in late April. We have no information on whether the platform's usage was affected, but marketing data shows Duolingo took a heavy hit : on TikTok, all their videos were deleted and their profile was made private. Their account was recently restored and their videos made public once more, but their comments continue to be flooded by users expressing their frustration over the companies shift to AI. If this was a marketing move, it certainly failed, with the latest data showing a fall in monthly followers of 1.4 million (1.5 million followers were gained in February, and only 100,000 were gained in April). Some figures for May show losses of half a million followers for Duolingo. If these followers were active users of Duolingo, this would represent a contraction of 1.3% of Duolingo's active user base, of which about 25% are paying subscribers.

    Duolingo trades at an extremely high price. A 249 P/E ratio is extremely rare, meaning it trades more as a high-growth/speculative company than a tradition tech sector company. Its market cap is a staggering 34 times larger than its revenue, meaning that it would need to increase its revenue by over 800 million to be valued at a more reasonable 15x. This would mean 3 years of straight 30-40% gains in revenue, and much stronger profit margins. Concerning profit, their current margin is around 10%. This is quite low for their price, but Wall Street bulls have trust in their future growth prospects : most of the high price comes from the belief that Duolingo will be able to continue to grow their revenue by double digits for years to come and face no slowdown. Any bump, such as one from a social media fail, would result in a cratering in stock price as Wall Street begins to price the company for its actual worth, which is around 7-10 billion $.

    The company already controls a large amount of the market, meaning it would constantly need to get more paying users at a rate of 10s of millions every year. Given that most of their users are acquired through social media, they would have to continually gain followers and exposure, yet their AI troubles seem to have the TikTok community rallied behind them. There is no reliable way to see if their users were affected, especially considering that they only make money from paying users, but it is possible that they took a hit. In any case, any small drop in users and subscriptions would result in a fall in stock price given their astoundingly high valuation. In any case, the stock is extremely expensive, and any growth is based on pure speculation, not grounded fundamentals. The TikTok situation must be rechecked before their earnings to see if the AI backlash has washed over, because if it hasn't, a strong case made be made for a sell rating.