Duolingo (DUOL): The Future of Education or the Needle Destined to be Lost in the Ever Growing Haystack

When evaluating companies in the rapidly evolving world of digital education, Duolingo immediately captures attention. As a user myself, I found the app's gamified, engaging methodology for foreign language acquisition highly compelling. This initial curiosity—driven partly by the app's persistent push toward its paid subscription tier and third-party advertisements—prompted a deeper dive into the company's underlying value proposition.

With artificial intelligence (AI) continually improving and the potential for competing platforms to leverage this technology to create superior or cheaper products, the central question for investors is clear: Will Duolingo continue its trajectory of explosive growth, or will it be overshadowed by competitors?

The Journey to a Small Position

My interest in Duolingo's stock has followed a volatile path. I initially tracked the stock earlier this year when it traded in the high $200s. While the company’s growth profile was intriguing, the valuation felt rich, prompting me to wait for a price drop before considering a position. When the price surged rapidly, ultimately surpassing $500 per share, I lost interest entirely.

However, the recent, significant price correction—bringing the stock back under the $200 mark—re-ignited my conviction. On November 14, 2025, I initiated a very small position relative to my portfolio size, purchasing 2 shares at $185 per share.

The Financial Engine: Free Cash Flow (FCF)

As of the writing of this article, Duolingo’s market capitalization stands at approximately $8.56 billion. The most remarkable aspect of the company's financial story is its explosive growth in Free Cash Flow (FCF): $2.964 million in 2021, $43.532 million in 2022, $139.930 million in 2023, $264.373 million in 2024, and $266.692 million YTD 2025 (Q3).

With FCF already surpassing the 2024 figure by the end of Q3 2025, the company is on track to approach $350 million in FCF for the full year.

This rapid growth typically accompanies a premium valuation that is often unrealistic. While I considered the stock prohibitively expensive in the $500 range, the recent collapse brings the valuation into a more tolerable, if still stretched, area. Using the 2024 FCF figure, the Price-to-FCF ratio sits around 32. Although this remains outside my preferred value range of under 20, the current pace of FCF growth suggests that—assuming the stock price remains relatively flat and the growth rate doesn't dramatically decelerate—this ratio could drop below 20 within the next couple of years.

Duolingo is currently in a rapid growth phase and does not issue a dividend, nor are significant debt or share issuance activities (aside from a $430 million stock issuance in 2021) observed in recent years.

The Primary Concern: Stock-Based Compensation

The most significant red flag in Duolingo's financial statements is the growing use of stock-based compensation (SBC), which has increased from $40.8 million in 2021 to $110.48 million in 2024.

While this figure is small relative to the overall market capitalization, it is concerning when compared directly to the company's cash generation. In 2024, the SBC expense was equivalent to over 40% of the Free Cash Flow generated. The investment thesis hinges on the rapid growth of FCF outpacing this expense, causing the SBC-to-FCF ratio to continually drop. Should the company’s FCF growth hit a wall for any reason, this level of dilution would become a major concern.

Balance Sheet Strength and Core Profitability

On the whole, Duolingo is structurally positioned for financial resilience. The balance sheet is robust, showing $1.121 billion in cash and short-term investments against a minimal long-term debt of $93.26 million. Shareholder equity also stands strong at $1.307 billion for a technology company of this market cap. Crucially, the company maintains a conservative goodwill and intangible assets section of only $63.30 million, limiting the risk of future write-downs.

Furthermore, Duolingo has successfully transitioned to clear profitability. Revenue expanded from $250.77 million in 2021 to $748.02 million in 2024, with net income improving from a loss of -$60.13 million to a profit of $88.57 million during the same period.

Investment Rationale and Future Risk

My typical investment strategy favors established, cash-generating businesses or companies whose valuations offer an attractive margin of safety, even if growth moderates. I generally avoid high-momentum companies, where valuations often run far ahead of underlying financial reality.

However, the recent plunge in Duolingo's stock price, combined with its proven ability to generate massive FCF growth, presents a compelling opportunity. While I am not rushing to dramatically increase my exposure, I may gradually scale up my position size at the current price of $185 or lower, provided the FCF growth trajectory—even if slightly decelerated—remains firmly intact.

The single biggest factor introducing uncertainty is the ability of new competitors to leverage recent advances in AI to create similar or superior educational products at disruptive pricing. This technological risk remains a key variable that warrants close monitoring.