Duolingo, Inc. DUOL has recently experienced a notable uptick in its stock price. Over the past month, Duolingo's stock has surged 22.2%, a significant gain compared with the broader industry’s 5.7% rise.

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In the last trading session, Duolingo's stock closed at $223.18, which is 11% below its 52-week high of $251.3. The stock is trading above its 50-day moving average, an indication of bullish sentiment among investors.

DUOL Trades Above 50-Day Average

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While the one-month performance paints a positive picture, it's crucial to look at the year-to-date movement for a fuller understanding. DUOL's stock has dropped 2.1% in the year-to-date period, suggesting that the stock has been in consolidation so far this year. Close competitors like Coursera COUR and Chegg CHGG have seen declines of 60.7% and 83.1%, respectively, year to date.

With Duolingo's recent momentum, investors may be wondering if there could be a breakout in the stock followed by a good upward movement. Let’s take a closer look.

DUOL’s Growth Through Innovation

Duolingo is committed to product excellence and innovation in language education. Its platform offers interactive lessons in multiple languages, employing gamified techniques to engage users through exercises, quizzes and challenges. Its user-friendly interface makes language acquisition enjoyable and accessible for learners worldwide.

The company's strategic focus is on teaching more effectively, expanding its user base and converting those users into paying subscribers. In 2024, Duolingo placed a significant emphasis on refining its subscription offerings, such as the family plan and Duolingo Max. This dedication to product quality has fueled organic growth through word-of-mouth recommendations, generating valuable data that allows for continuous product improvement, further boosting user engagement and subscriber conversion rates.

This strategy is reflected in Duolingo's financial performance. In the second quarter of 2024, the company reported a 41% year-over-year increase in revenues and a 38% rise in bookings. This growth is driven by a 59% increase in daily active users and a 40% increase in monthly active users, along with a 52% surge in the number of subscribers. Additionally, the company posted a net income of $24.4 million for the quarter, a significant jump from $3.7 million in the same period last year. The adjusted EBITDA margin also saw a notable improvement of 1,050 basis points.

Buoyed by strong confidence in its higher-priced subscription tiers and enhancements to the family plan, Duolingo has raised its 2024 bookings growth guidance to $824 million at the midpoint, up from the previous estimate of $813 million. Furthermore, the company has adjusted its EBITDA margin guidance to 24.5% at the midpoint compared to the earlier forecast of 23.5%.

DUOL’s Effective Capital Utilization and Strong Liquidity

A key measure of a company's profitability is its return on equity (ROE), which indicates how efficiently it uses shareholders' investments to generate earnings. At the end of the second quarter of 2024, DUOL's ROE stood at 9.6%, above the industry average of 8%. This suggests that Duolingo has been effective in investing in profitable areas, a point further supported by its return on invested capital, which is 9.1%, well above the industry average of 3.9%.

Duolingo's liquidity position is also robust, with a current ratio of 3.28 at the end of the second quarter of 2024 compared to the industry’s 1.02. A current ratio above 1 indicates that Duolingo is well-positioned to meet its short-term obligations, providing a buffer against potential financial challenges.

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DUOL’s Promising Growth Prospects

Looking ahead, the Zacks Consensus Estimate for Duolingo's 2024 earnings is pegged at $1.87, suggesting an impressive 434.3% increase from the year-ago level. Earnings in 2025 are projected to increase by 50.3% year over year. The company's sales are expected to grow 38.6% in 2024 and 28.5% in 2025, indicating strong top and bottom-line growth prospects.

This positive outlook is reinforced by upward estimate revisions. In the past 60 days, six estimates for 2024 earnings have been revised upwards, with no downward revisions, reflecting strong analyst confidence in the company. The Zacks Consensus Estimate for 2024 earnings has increased 7.5% during this period. Six estimates for 2025 earnings have been revised north, with no southward revisions. The Zacks Consensus Estimate for 2025 earnings has increased 6.4% during this period.

Duolingo is a Must-Buy

Duolingo’s continued success is driven by its dedication to product excellence, effective monetization strategies, and a steadily increasing user and subscriber base. Combined with its robust financial health and strong liquidity, the company is well-positioned for ongoing growth. With a solid financial base and a promising outlook, investors may find this to be an ideal time to consider adding DUOL to their portfolios.

DUOL currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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