Duolingo: Marketing genius + Game content expansion = Sustained growth?

$Duolingo(DUOL.US) released its Q1 2025 earnings before the U.S. market opened on May 2. Benefiting from the global social media campaign "Dead Duo" at the beginning of the year, Duolingo's growth momentum was quickly ignited, sweeping away the profit gloom of the previous quarter and delivering a report card that almost entirely exceeded expectations.

Key Earnings Highlights:

1. Social Media Marketing Remains the "Killer Move": In Q1, Duolingo launched a global marketing campaign "Dead Duo" to rescue Duo, which activated a large number of dormant users, driving quarterly MAU to 130 million, a net increase of 13 million users compared to the previous quarter, equivalent to half a year's growth in the past.

The biggest advantage of social media marketing is its low cost. Although sales expenses accelerated in Q1, the calculated customer acquisition cost per user was as low as under $2, significantly lower than the usual $3-5 per person. During the earnings call, management mentioned that "mature markets actually grew the fastest," which, for Duolingo, means acquiring high-value users at low costs—a total win.

2. User Stickiness Rivals 'Real' Social Platforms: While expanding its user base, Duolingo's DAU/MAU ratio not only rivals most social platforms but continues to improve, which is the core reason Dolphin Research is bullish on Duolingo's ecosystem.

Despite a surge of 'new' users in Q1, user stickiness remained robust and even improved. This is quite impressive. Dolphin Research believes that, aside from the product's excellent user experience, the "Dead Duo" campaign likely primarily reactivated dormant users, who, once re-engaged, didn’t go through a beginner phase that would drag down average stickiness.

3. Higher Stickiness Drives More Paid Conversions: Willingness to pay generally follows user engagement—the more active the users, the higher the conversion rate from free to paid. Thus, the paid subscription rate (Subs/Avg. MAU) actually rose to 8.9% in Q1, primarily due to DAU growth, or more accurately, improved user stickiness.

If we purely compare Subs/avg.DAU, this figure slightly declined, but the trend is reasonable and aligns with natural logic—whether new users or reactivated dormant users, their initial or re-engagement phase tends to lower the platform's overall willingness-to-pay metrics.

4. Room for ARPPU Growth Remains Significant: Subscription ARPPU in Q1 grew 1.7% YoY. While the increase remains modest, it marks two consecutive quarters of reversal, likely driven by the penetration of high-tier MAX subscriptions rising from 5% last quarter to 7%, with user count growing from 450k to 720k.

Currently, like Spotify and Netflix, Duolingo prices its subscriptions differently by region. However, it doesn’t strictly align with local GDP or income levels but also considers local education willingness. For example, China has only a slight discount (3%~5%), despite its significantly lower per capita GDP than North America.

Meanwhile, the highest discounts are offered in India, the most populous country. This likely reflects the high barriers and limited accessibility of local education resources, prompting Duolingo to prioritize low-cost，普惠-type user penetration and brand education.

Overall, the current subscription ARPPU of under $6 per month still has room for growth. But short-term progress depends on the company's strategy, particularly how it balances the penetration of MAX and family plans.

5. Guidance Raised, but Hints at Slower H2 Growth: Due to strong Q1 operational metrics, both Q2 and full-year revenue guidance were raised. However, a minor flaw is that the new full-year guidance implies a minimum H2 growth rate of 28%, noticeably slower than H1's 33%, despite H2 last year not being a high base.

This could reflect management's conservative guidance, but it also suggests the company remains focused on user penetration over monetization for now.

However, management has repeatedly emphasized plans to expand course content, such as the upcoming chess course. Since it involves more realistic and gamified PvE experiences, this could further boost user stickiness and drive higher paid conversions.

This opens up new possibilities—game-like content could be aggressively incorporated.

6. Short-Term Gross Margin Optimization Stalled, but Long-Term Improvement Trend Intact: Q1 gross margin declined QoQ and YoY due to AI and video costs tied to MAX. Given that MAX subscription penetration will continue rising, the company expects gross margin improvements to pause this year.

However, during the call, management mentioned internal cost optimization efforts via AI, primarily targeting content production costs through GenAI. This makes sense—Duolingo's content doesn’t require high-end design, rendering, or dynamic effects but focuses on interactivity and user habit optimization (e.g., identifying when users feel fatigued and likely to quit, then offering timely incentives to keep them engaged). These are areas where AI excels.

Additionally, since a major cost component is platform fees (e.g., Apple Tax, Google Tax), Duolingo explored redirecting users to its website for payments. Early tests showed this introduced friction, potentially lowering conversion rates, so the company isn’t rushing to implement it.

Overall, short-term cost optimization is stalled, but the gradual improvement trend over the medium-to-long term remains unchanged.

7. Free Cash Flow Margin Continues to Rise

Q1 free cash flow grew to $10.301 billion, with the margin rising to 44.6%. Strong business models rarely face cash flow issues, and cash flow inflection points and stability typically outperform profit metrics. A 45% FCF margin underscores Duolingo's cash-printing prowess.

8. Key Financial Metrics at a Glance

Dolphin Research's View

While we’ve seen Duolingo’s social media marketing prowess before, the "Dead Duo" campaign—with 1.7 billion global impressions—once again confirms the company’s marketing genius.

With total marketing costs under $27 million (including major expenses like salaries), the campaign brought in 13 million active users at just $2 per acquisition. Even better, these were high-value users from mature markets like North America and Europe. Low-leverage acquisition of premium users—this kind of win seems unique to Duolingo.

The upcoming chess course further strengthens Duolingo’s "gaming DNA," amplifying its cash-printing business model by transforming the platform into a subscription-based "cloud gaming" service that blends entertainment with learning, doubling down on user experience.

Under this logic, neither short-term MAX penetration pressures on costs nor family plan impacts on gross margins may be core valuation factors anymore. The only metrics to watch each quarter are MAU and DAU/MAU.

At a $22.5 billion market cap (post-earnings surge), Duolingo is just a step away from Dolphin Research’s earlier initiation coverage optimistic target of $25 billion. While we underestimated Q1 user growth, aligning company guidance and market expectations, the current valuation implies EV/Adj. EBITDA multiples of 75x/55x for 2025/26.

From a short-term relative valuation perspective, this remains neutral to slightly elevated (25-27 EBITDA CAGR ~35%). Thus, the current valuation partially prices in the potential breakout effects of upcoming game-like content (e.g., chess) on existing users.

Below are Duolingo’s earnings charts: