Duolingo: Learning Skin, Gaming Heart? The "Code Printing Machine" is the Soul

At the beginning of the year, Xiaohongshu and Duolingo gained popularity due to the "TikTok refugee trend." On January 14, $Duolingo(DUOL.US) disclosed on its official blog that the number of Mandarin learning users surged by 216% year-on-year.

As a language learning platform, the competitive barrier for content is not exceptionally high, wzlsij since Duolingo's courses cater to generalized scenario needs. Therefore, the core user base mainly consists of workers and tourists with foreign language communication needs, as well as students driven purely by interest.

However, even with such a group of non-essential users, Duolingo has still managed to achieve the top spot in educational app downloads in most countries and regions.

The reason for focusing on Duolingo at this time is not solely due to the events at the beginning of the year. The core belief of Dolphin Research is that Duolingo's business model is superior to that of streaming media. It features gamified and programmatic teaching characteristics, which align with a code-driven cost model, resulting in relatively low marginal input costs, unlike streaming media which relies on continuous and high content investment. As long as the user base grows and reaches a certain scale, it can become a healthier cash cow than streaming media.

During the recent month of stock market corrections in the U.S., Dolphin Research has also been focusing on sorting out companies with excellent business models and relative competitive advantages, waiting for them to fall into the range of reasonable valuations or even pessimistic expected valuations; otherwise, high prices always affect the holding experience.

Duolingo is one of those niche but beautiful companies. It was already not cheap, and after riding the AI wave, its valuation has skyrocketed. As of now, the valuation of $15.3 billion against 2025 performance shows an EV/Adj. EBITDA of 56x.

Last month's Q4 financial report prompted Duolingo to initiate a valuation adjustment due to profit guidance falling short of expectations. The pressure on profits is related to slower monetization and AI cost recognition, and management is guiding the market to focus on user growth rather than immediate monetization deepening.

Dolphin Research believes that how long profit pressure lasts primarily depends on the competitive environment. If the competitive advantage remains unchanged, the impact on profit margins from expanding into low purchasing power regions need not be overly concerning. However, to provide a sufficient safety cushion, it is also necessary to wait for the right time.

The following is the full detailed research

1. The Pioneer of Pain-Free Learning

Among global language learning software, Duolingo, represented by the quirky abstract green bird Duo (Chinese name: 多儿), can be considered a top player, especially among the younger user demographic, where its recognition is widespread. On mainstream social platforms, Duolingo's official account has a follower count comparable to that of influencers.

As of the latest 4Q24 financial report, Duolingo has over 500 million registered users globally, with an average monthly active user count of 117 million, a year-on-year growth rate of 30%. In the online language learning platform sector, Duolingo's user scale market share reaches two-thirds. In most countries and regions, Duolingo consistently ranks in the top 10 of the education category on the iOS download charts.

As a learning platform, having over 100 million regular users with high stickiness is impressive. Dolphin Research calculates that Duolingo's DAU/MAU exceeds 30%, and during the post-pandemic period of the last two years, while the user base has rapidly expanded against the trend, stickiness has simultaneously increased. As of 4Q24, user stickiness has approached 35%.

What does a 35% user stickiness level mean? It can be directly compared to a set of data. As shown in the chart, although Duolingo is lower than social platforms with instant messaging features, it can still compete with content platforms like YouTube and Reddit.

This breaks some preconceived notions, as learning inherently has some anti-human characteristics; boredom and pressure are common feelings associated with learning.

Generally, ordinary users mainly have language learning needs in the contexts of work, travel, and cultural exchange beyond their native language. However, learning needs can be met through campus courses, and due to the high professional requirements, training services provided by offline professional institutions are often more suitable.

The remaining needs for work, travel, and cultural exchange seem less urgent, so most users exhibit low self-discipline, making it very easy to interrupt their learning. Additionally, users wishing to engage in immersive learning on the Duolingo platform must pay to remove ads. The subscription fee of over $80 a year (Super version) is significantly cheaper compared to offline training institutions, but it still carries a sense of "paying to suffer."

In this context, when Duolingo further breaks into new user segments, user stickiness (DAU/MAU) should naturally decline. Therefore, Duolingo's "counter-trend" growth is interpreted by the market as a signal of high growth, and its current market value of $14 billion corresponds to a high valuation level of 50x EV/EBITDA for 2025So the question arises, what truly supports Duolingo's high growth?

II. The market is vast, but not a blue ocean

Although Duolingo surpasses many competitors in terms of recognition and user numbers, the language learning industry it belongs to, valued at hundreds of billions of dollars, has never ceased to be competitive.

The two key reasons are: 1) The low barrier to language content and its non-exclusivity; and 2) Significant localization characteristics.

These two factors directly lead to a highly fragmented competitive landscape in the language learning market. Especially the latter, which sometimes makes it difficult for online platforms that break the constraints of time and space to compete against locally established brands.

From the data perspective, comparing user scale, Duolingo has over 100 million users globally, making it an absolute leader among online platforms, capturing two-thirds of the market share by itself. However, HolonIQ estimates that about one-quarter of the global population, approximately 1.8 billion people, belong to the language learning user group, with Duolingo's active user count accounting for less than 6%. If we look at the cumulative 500 million registered users, it accounts for 25%, which reflects its "leading" characteristic.

In terms of revenue share, Duolingo's revenue scale of 530 million USD in 2023 only represents a 2% market share in the entire online language learning market (according to Research and Markets, the online language learning market is expected to reach 28 billion USD in 2023), not to mention the even larger offline language learning market (approximately 1.5 times that of online), which further dilutes its overall market share in the language learning sector.

A market with significant localization characteristics also means that there are many local players. For a platform to enter a new market, it needs to undertake considerable localization work (regulatory licenses, customer acquisition channels, etc.). Although it cannot completely weaken the advantages of local brands at this stage, technological advancements still provide more possibilities for cross-market penetration, and the trend towards online integration in the entire market is undeniable, especially with the continuous optimization and upgrading of AI technology.

Therefore, conversely, the current fragmented market structure implies that the theoretical growth space for players that can survive in the market in the future is also considerable.

However, dreams and reality cannot be equated directly, especially in such a fiercely competitive market. What gives Duolingo the ability to survive until the end and enjoy the fruits of victory? Hold on, let's first take a look at how it has navigated its path in the past.

III. Not focusing on content but on product

Since language content has no barriers, Duolingo sets its barriers in the overall product design—transforming the business of selling courses into an interactive game. Why did Duolingo have this idea back then? It starts with the management team. It is said that a company's operating style can be seen by its founder. Duolingo's ability to stand out among a plethora of educational platforms is indeed inseparable from its soul figure—Luis von Ahn. It is his personality and background that determined Duolingo's differentiated path.

Duolingo is widely considered to have been established in 2011, mainly based on the timing of its current main business (ToC online language learning platform). In fact, before 2011, Duolingo's predecessor already existed, but it mainly operated as a B-end crowdsourced translation platform, where personal language learning was completely free, and there were no ads to watch.

At that time, how ToC language learning platforms could make money was something Luis had not figured out. Luis does not have a background in linguistics but was a professor of computer science at Carnegie Mellon University. He struck it rich by selling two technologies, "login CAPTCHA" and "human bot recognition certification" (CAPTCHA and reCAPTCHA), to Google, achieving what could be called "financial freedom" at that time.

Therefore, with no financial worries, when Luis found a group of his students to co-develop Duolingo, he was simply driven by the value of "educational inclusivity" and the idea of "thinking about how to make language learning fun"—this is also the key reason why Duolingo still offers a free model to this day.

To enhance the product experience, Luis, along with another core founder, Severin Hacker, participated in product development from start to finish, designing courses for Spanish and German by learning the languages from each other. After that, for other language learning, they hired professional linguistics PhDs to participate in course design.

Two computer science experts venturing into education destined the product to be more technology-driven rather than content-driven. However, Duolingo did not aim to create highly specialized language courses (for example, exam certifications, but since the English subject system is relatively complete and has abundant resources, Duolingo's launch of English exam certification has no barriers), but rather focused more on general language communication scenarios.

Since the goal is to apply to general communication scenarios, the requirements for the completeness of the course content system are not that high. Of course, this is also a complaint from many users, that Duolingo lacks systematic grammar learning. However, language learning is relatively simple in educational content, so for the platform, the design of course content cannot form a real barrier. So, building competitiveness has shifted to the area familiar to the two founders—technology-driven product design.

Therefore, using "the fun of games" to offset "the dullness of learning" to enhance user stickiness is Duolingo's biggest product selling point. There is a lot of discussion in the market about this, and interested readers can download the app to experience it for free. Dolphin Research will not elaborate too much here, just a simple summary:

In summary, it achieves a psychological satisfaction similar to "a sense of achievement" in games through common "level-clearing gameplay," combined with the PVP social attributes of leaderboards, as well as incentives like experience items and gems for completing task goals, creating an addictive experience that users can't stop.

In September 2024, Duolingo launched the "Adventure Mode" (in English & Spanish), further enhancing the "gamified" experience. In this mode, users can immerse themselves in Duolingo's virtual world, completing tasks through dynamic plot settings and character dialogues to achieve language learning outcomes.

After turning the "content business" into a "game product," it naturally leads to the thought that the main driving force for user engagement and revenue growth, besides the expansion of content, is the continuous innovation of product features.

It is worth mentioning that the recent surge from 2023 to now (with market value rising from 3.2 billion USD to 14 billion USD) comes from an eye-catching feature update—an early collaboration with OpenAI to lay out AI:

First, in March 2023, the AI teaching experience was launched, mainly including two services: Explain My Answer and Roleplay, which already provided a preliminary experience of one-on-one teaching.

Then, in September 2024, this AI service was further upgraded by designing a virtual AI character—"Cool" Lily, to deepen users' sense of personification and immersion, bringing it closer to the ultimate goal of the founding team—AI one-on-one teaching!

But then again, can Duolingo's product selling points be directly imitated by competitors?

For example, the current language learning platforms that directly compete with Duolingo, ranked by user scale from large to small, mainly include Babbel, Mondly, Busuu, Memrise, HelloTalk, etc. Among them, there are also many platforms with gamified interactive features, but it seems that gamification is not the core experience nor the main selling point of their products.

Dolphin Research believes that simply adding basic gamification is not difficult; the challenge lies in transforming the entire product into a gaming experience (such as Duolingo's PVP competitive ranking mode), which requires a complete business model to support it. If similar features are merely added but the essence remains to sell courses and content, it will not be sufficient to change user perception.

More critically, even if a competing platform were to recreate a "Duolingo 2.0," it seems it would not be as impressive as the green bird named Duo. As is well known, in addition to gamification, another feature of Duolingo is its effective use of social media IP-style marketing.

IV. Internal Competition: Extremely Efficient Customer Acquisition Methods

Unlike other online education platforms that frantically seek various channels for customer acquisition, early Duolingo relied almost entirely on word-of-mouth marketing driven by the product's hard power. Currently, Duolingo's main marketing methods include: creating an IP image, active social media interaction, initiating topics, and leveraging trending events.

This type of official, hands-on social media marketing often incurs low costs. The only relatively high expenditure in Duolingo is sponsorship in high-traffic exposure formats, such as last year's Super Bowl advertisement sponsorship.

When new users arrive at Duolingo, the nearly zero-threshold basic course design and level-up gaming experience allow new customers to "learn painlessly" on the platform for some time.

In addition, due to learning inertia, the timely awakening of users is equally important. Duolingo utilizes dynamic changes in the app's logo, notifications at specific times, and even a "self-discounting" family plan (the per capita price of the family plan is about 30% of the individual plan, but it can improve retention among family users) to focus on re-engaging old users.

Learning itself is contrary to human nature. Although Duolingo incorporates gaming elements, its user churn rate cannot be compared to that of leading games or social platforms. After all, in the past two years, while actively expanding its user base to attract more non-essential, low-paying users, if no measures are taken (such as the aforementioned logo changes, SMS reminders, and family plan promotions), most new users will quickly become dormant after the novelty and beginner protection period (basic courses) wear off.

However, according to the IPO prospectus and the Q1 2023 financial report, Duolingo's annual member retention rate is 92% (up from 40% in 2020), which means an average monthly churn rate of about 7%. This level, while higher than Netflix's 3% and Spotify's 4%, is still significantly better than the 20%-40% of its online language-learning peers!

The above set of marketing strategies has narrowed the gap between the platform and its users, especially with the image of the crazy green bird IP. Dolphin Research calculates that Duolingo's comprehensive customer acquisition cost is very low (considering the net new users after accounting for churn), averaging only about $3-5 per user over the past two years, outperforming many peers or content platforms.

Dolphin Research believes that on the surface, this is merely a difference in marketing tactics, but essentially it reflects the difference between a " course-selling mindset" and a " product mindset."

V. The Core of the Gaming Business Model

Comparing Duolingo with streaming giants (Netflix, Spotify), it is mainly because Duolingo also adopts a subscription model aimed at C-end users (launched in 2017). Although the product itself leans more towards gaming, the payment methods differ significantly from in-game purchases or download fees.

Duolingo's membership is divided into three types, with different pricing systems set for different regions to adapt to local purchasing power and lower the threshold for new users. Taking the United States as an example:

Free plan, users need to watch a short advertisement of 15-30 seconds after completing each lesson. Some features are limited, such as the number of hearts for reviving (used for reviving after failing a level).

Individual plan Super, annual fee of $83.99 (usually has a promotional price of $59.99 at the beginning of the year), a monthly fee of $12.99;

Family plan Family, covers up to 6 people, annual fee of $119.99, no monthly payment option.

Additionally, if using the Max feature: which is the AI functionality developed based on the GPT large model, including Explain My Answer and Roleplay, as well as Lily

Then the annual fee for the individual plan with Max functionality increases to $167.99, and the annual fee for the family plan increases to $199.99, with only annual payment supported.

Duolingo's pricing design for this package aims to encourage users to subscribe to the more cost-effective annual membership. This allows Duolingo to maintain a stable subscription user retention rate with lower user maintenance costs.

In addition to subscription fees, free users can generate advertising revenue. However, currently, the efficiency of ad monetization is low, with a single ad user generating only $0.55 in revenue per year, far less than the $91 per person per year from subscription users. A simple comparison of the per capita revenue ratio between ad users and subscription users on Spotify shows that Duolingo's figures are abnormally low.

Dolphin Research believes this reflects a management strategy:

The role of the "free model" is not in ad monetization but as a means of attracting users. Whether now or in the foreseeable future of three to five years, subscription fees will be the only primary business model the company relies on.

While free users are not expected to generate revenue, the purpose of retaining ads is to create some "discomfort" in the user experience, thereby prompting users to switch to paid subscriptions. As the free users on Duolingo gradually become highly engaged users, there will be potential for further conversion into paying users and monetizing more value in the future.

Aside from subscriptions and ads, the remaining revenue mainly comes from English test fees and in-app purchases (buying gems to exchange for delays, revivals, and other items). This revenue accounts for less than 10% of the total and has unstable growth. The largest English test fee, after experiencing the pandemic boom, is unlikely to see significant growth in the short term, so it is not a focus of our analysis.

If most users are annual payers, then the average monthly price of $7 is lower than the listed prices of Spotify and Netflix. If using a family plan, the average monthly cost per person is only $1.70. For users with a strong need to learn a foreign language, this price is considered very affordable relative to the average purchasing power level viewed as a game, the average revenue per user is also lower than that of typical games.

Despite the low unit price and payment rate, Duolingo has achieved stable profitability since 2022.

As of the recently concluded 4Q24, the Non-GAAP operating profit margin has stabilized at 25% (adding back the 17 percentage points squeezed by SBC expenses), and we believe there is still room for further improvement. This level of profitability is comparable to Netflix, which has 300 million users (28% in 2024), and far exceeds Spotify, which has 680 million users (12.5% in 4Q24).

However, as a streaming subscription platform, when the profit margin reaches 25%, Duolingo's subscription payment rate is only 8%, far lower than Netflix (100%) and Spotify (40%), and this small amount of subscription revenue already contributes 80% of total revenue.

From the perspective of cash flow profit margin, the gap is even larger. Duolingo's free cash flow profit margin (free cash flow/revenue) has been rising quarter by quarter, reaching 42% in 4Q24. Meanwhile, Netflix's figure for 2024 is 18% (seasonal), and Spotify's new high in 4Q24 is only 21%.

Why has Duolingo achieved higher profitability and healthier cash flow with a lower monetization level?

—— The answer can be found in the previous analysis:

(1) More cost-effective "code costs" rather than the continuously required "content costs" — costs/expenses that can be diluted as scale expands.

(2) IP-style marketing that brings users closer and enhances brand recognition — lower customer acquisition costs.

Dolphin Research has already discussed Duolingo's marketing strategy, so here we will focus on the advantages of code costs.

As we all know, Netflix has long been a dominant player in the long video field. The difficulty in tackling Netflix lies in its years of content production capabilities. However, no matter how much big data is used to increase the probability of hit shows, it still requires an investment of over 10 billion dollars a year.

From the historical investment rhythm, Netflix has maintained a pace where the amount of content costs amortized in the current period matches the amount of new content investment in the same period. However, in the past two years, due to the pandemic, slowed competition, and Hollywood strikes, Netflix intentionally slowed down its content investment and even started a new cycle from 2024

Although Spotify does not invest in content creation itself, thus reducing the risk of bearing the pressure of hit probabilities, the cost is that it needs to continuously share a large portion of its revenue with copyright holders due to the acquisition of music copyrights. However, because Spotify has high traffic, it is leveraging this advantage to guide the redistribution of traffic and reduce the overall revenue-sharing ratio through bundled packages to improve gross margins.

From this perspective, Duolingo is completely free from the troubles faced by the two big brothers above, as the barriers to language learning are not based on content.

First, the content investment itself does not require much: Language learning belongs to the most basic and universal educational content, and due to its focus on general scenario language learning, most users do not need continuous new content to stimulate ongoing subscriptions during the learning cycle. Therefore, the difficulty of content development for Duolingo is significantly lower.

Second, Duolingo does not have a draining upstream: All course content is designed and developed by its own hired personnel, with the main investment being code costs—salaries for developers and basic server infrastructure. This also means that Duolingo's R&D expense ratio is significantly higher than others, but these R&D costs can be diluted by expanding the user base and deepening monetization.

The only costs affecting gross margins are the 20%-30% channel share, which includes the Apple tax, Google tax, and some AI costs that have only recently begun to be confirmed (starting from Q4 2024).

In summary <1-2>, high gross margins + low marketing = maximization of marginal returns, which is the scale advantage of platform economics we often talk about. Comparing the Contribution Margin of the three companies, i.e., gross sales difference/revenue, reflects how much profit increase is gained for each unit of fixed cost. As shown in the chart below, Duolingo has a higher-scale economy compared to Netflix and Spotify.

Therefore, compared to streaming media, Dolphin Research believes that Duolingo is essentially more like a perennial game, with content including level challenges and PVP rankings, stimulating users' competitive spirit and sense of achievement. In terms of product operation, it has evolved from code-driven development to establishing IP and reputation, and finally achieving long-term operation through the addition of basic courses and more iterations of product features.

6. Has the valuation bubble of Duolingo been squeezed out?

After discussing so much, let's return to the initial question: What supports Duolingo's high growth under its high valuation?

1. Expanding regions and increasing conversion of existing paid users

In summary, the growth on the revenue side mainly comes from:

1) From the industry perspective, the market space is very large. Although competition is fierce, Duolingo's differentiated product design and efficient operational capabilities can at least provide it with a relative advantage for the next three to five years, making it unlikely for existing competitors to surpass it. However, from a long-term perspective, potential risks are difficult to accurately assess, mainly stemming from AI competing for marginal users.

2) From its perspective, it relies on the conversion of free users to paid users and the potential for ARPPU improvement.

Referring to the ecosystem of Spotify and ordinary mobile games, it is assumed that Duolingo can increase its payment rate in the next five years through some accelerated conversion measures (such as increasing membership benefits, reducing the number of "revival hearts" for free users, etc.).

By unlocking more personalized needs through features similar to MAX, it is also expected to gradually increase the currently low ARPPU. However, considering factors such as similar pricing among competitors, lower purchasing power in developing countries, and the increasing penetration of more cost-effective Family plans, Dolphin Research is relatively conservative about the improvement of ARPPU (the management has also indicated that expanding regional markets to increase user penetration is the primary goal at present).

To explore different possible growth prospects, Dolphin Research has made performance expectations for Duolingo from pessimistic, neutral, and optimistic perspectives. The three core indicators MAU, paid penetration rate, and ARPPU under the three different expectations for the next five years are as follows:

a. Under neutral expectations, the monthly active users will reach just over 200 million in five years (1.17 million at the end of 2024), mainly referencing the current user growth trend (currently, DAU is still growing globally at 40-50%), as well as the incremental growth brought by further penetration into potential regions:

On one hand, there are countries where English is a second language, such as populous Asia-Pacific countries like China, India, and Southeast Asia, as well as Latin America, where there is a high dependence on English for work and life. On the other hand, there are many countries in Europe with frequent cultural exchanges, which also need to rely on languages like Spanish and Italian as foreign language supplements.

Duolingo's CEO has repeatedly expressed in conference calls that the demand for English learning accounts for nearly 80% of global language learning users. On the Duolingo platform, English is the most learned language in 135 countries and regions worldwide, and it is the only language among the top 10 language studies that has been increasing year by year however, among Duolingo's current user base, management revealed that only half of the users are engaged in English learning, indicating that Duolingo may not be sufficiently internationalized (the proportion of native English users is too high), or that the English courses (especially in terms of professional depth) do not adequately meet the needs of all users.

b. Considering user stickiness and subscription penetration rate, it is expected that by 2030, the proportion of subscription users among MAU will be 10%, an increase of nearly 2 percentage points compared to 2024, which is equivalent to 1/4 of Spotify, 1/3 of typical mobile games, and the median level of paid rates for mainstream online education platforms.

The expectation for penetration rate is not considered aggressive by Dolphin Research. This is mainly because the current DAU/MAU is already relatively high (currently 37%, comparable to the current stable level of "Honor of Kings," which peaked at only 50% user stickiness), while the payment rate is only 8%. Compared to peers, it appears to have immense potential.

However, Duolingo's approach is different; it is not based on a course-selling logic but rather on a gaming ecosystem. Moreover, PVP competition is a very important component of this gaming ecosystem, which means a large DAU user base is needed to activate competitive ranking gameplay. Therefore, in terms of monetization, Dolphin Research expects management to gradually and cautiously advance, without forcefully pushing ahead recklessly.

Ultimately, although the increase is only 2 percentage points, it still represents a relatively strong boost to subscription revenue given the overall large MAU scale.

c. Per capita payment is expected to grow very slowly, as mentioned earlier. Under a neutral expectation, Dolphin Research anticipates that after passing the peak market expansion period in the coming years, the MAX features will begin to increase by 2% annually.

In summary, the overall revenue growth trend under different expectations is as follows:

2. Economies of Scale in Code Costs + Maintaining Efficient Customer Acquisition

In terms of profitability, the management set a medium to long-term profit margin target when it was newly listed—adjusted EBITDA of 30%-35%. As of 2024, Duolingo's profit margin has rapidly risen to 25%, improving at a rate of 8-10 percentage points per year.

However, this year may see pressure on profit margins due to the impact of AI cost investments confirmed in the previous two years, as well as a short-term operational strategy focused on customer acquisition—resulting in a significant slowdown in the pace of improvement. The management expects the adjusted EBITDA to be 27.5% in 2025.

With the mismatch period of two years of customer acquisition and AI investments coming to an end, Dolphin Research expects Duolingo to return to a trend of improving paid conversion and deepening monetization, leading to a slight increase in ARPPU, thus allowing the long-term profit margin level to reach 40%.

3. Current Valuation Still Has Some Emotional Premium

Since cash flow trends are more stable than financial profits, Dolphin Research prefers to use DCF for valuation, combined with relative valuation to assess how much expectation is currently priced in.

Assuming WACC = 9.6%, perpetual growth rate g = 3%, under the three different growth expectations mentioned above, Duolingo's valuation is approximately $12 billion for neutral expectations, $25 billion for optimistic expectations, and $6 billion for pessimistic expectations.

Taking the neutral expectation as an example, a market value of $12 billion corresponds to Dolphin Research's 2026 Adj. EBITDA performance forecast, which is about a 30x valuation (2025 is a mismatch period, so the valuation will be unusually high). As of the close on April 2, 2025, Duolingo's market value was $15.3 billion, corresponding to a market valuation of 42x for the 2026 performance expectations. Dolphin Research's short-term performance expectations are slightly more optimistic than the market's, yet the market has assigned a higher valuation.

This indicates that either the market remains optimistic about Duolingo's sustained high growth, or the performance is unclear, but some emotional premium is being assigned. In summary, under the potential inflation impact caused by current tariff fluctuations, Dolphin Research believes it is still advisable to be moderately cautious and maintain a safety cushion.

4. Cash Cows Can Also Attract Value Investors

In addition to growth-focused investors, Duolingo's business model will certainly attract some value investors. This can provide some value to the stock price when growth momentum stagnates and growth-oriented investments exit.

However, from the perspective of ROE, merely having profitability is not enough; timely buybacks or dividends are also needed to reward shareholders; otherwise, accumulating cash can weaken ROE. Therefore, for Duolingo, if dividends or buybacks are not timely executed before ROE weakens, the preference of value investors may also decline, when are value investors most motivated to support the bottom line?

If Duolingo can use 50% of its free cash flow in 2027, which is $300 million, for dividends and buybacks before the ROE weakens, and assuming a not low return rate of around 4%, it means that when the market value drops to at least $7.5 billion, value investors will have a strong motivation to support the bottom line.

Conversely, if we consider Dolphin Research's neutral expectation of a market value of $12 billion and a 4% return rate, it means an additional $480 million will be needed annually for dividends and buybacks. For Duolingo, this could be implemented as early as 2026. This could provide strong support for the stock price when growth is limited.

However, the above is a relatively pessimistic scenario. Based on the current user growth trend, the likelihood of growth peaking in 2026 is still low.