If you have been keeping an eye on Duolingo’s stock, you probably know how much of a roller coaster this language-learning company can be. Investors who bought in early have seen some remarkable gains, with the stock up 315.0% over the past three years. However, the returns have been much more modest recently. In just the last month, Duolingo’s shares jumped 13.7%, following a strong bout of enthusiasm for edtech plays that seem poised to benefit from ongoing shifts in education and technology. The stock is only up 0.7% in the past seven days and is actually down 0.3% year-to-date. This pattern hints that while investors see long-term growth potential, they are also becoming more cautious and are thinking carefully about how much they are willing to pay for future growth.

So, how do you decide if Duolingo is still a smart buy at these levels, or if the risk is starting to outweigh the reward? A great place to start is with the numbers. On many investing platforms, you will find “value scores” to help cut through the noise. Duolingo currently has a value score of 2, which means it is undervalued in 2 out of 6 different key checks. The score leaves plenty of room for debate about whether it is fairly valued, expensive, or even a bargain hiding in plain sight.

Before you make any moves, let’s break down what these valuation checks actually mean. Even more importantly, let’s get into a better way to put all the pieces together at the end of this analysis.

Duolingo scores just 2/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

A Discounted Cash Flow (DCF) model estimates a company’s intrinsic value by projecting its future cash flows and discounting them back to the present. This approach reflects both growth expectations and risk, determining what those future dollars are worth in today's terms and providing a data-driven assessment of a stock’s fair value.

For Duolingo, analysts use a 2 Stage Free Cash Flow to Equity model. The company’s last twelve months Free Cash Flow stands at $315 million. Projections, including both analyst estimates and further modeling, expect this number to climb steadily and reach $643 million by 2027 and a projected $1.19 billion by 2035. The initial years are based directly on analyst forecasts, while subsequent years are extrapolated by Simply Wall St’s research platform.

According to this DCF analysis, Duolingo's intrinsic value per share is estimated at $478. This value is 32.0% above where the stock currently trades, suggesting Duolingo is undervalued when focusing strictly on expected future cash generation.

Result: UNDERVALUED

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Duolingo.

Our Discounted Cash Flow (DCF) analysis suggests Duolingo is undervalued by 32.0%. Track this in your watchlist or portfolio, or discover more undervalued stocks.

When it comes to valuing profitable companies like Duolingo, the Price-to-Earnings (PE) ratio is a widely used metric. It tells investors how much they are paying for each dollar of current earnings, making it useful for companies that already generate positive bottom-line profits.

A “normal” or “fair” PE ratio varies based on a company’s expected earnings growth, the risks it faces, and the overall market or industry sentiment. Generally, faster-growing and more resilient businesses command higher multiples, while more mature or riskier firms trade at lower ones.

Duolingo’s current PE ratio is 127.1x

The average for similar peers is 33.4x

The Consumer Services industry trades at an average of 17.0x

Instead of just looking at industry or peer multiples, Simply Wall St’s proprietary “Fair Ratio” takes the analysis a step further. The Fair Ratio considers not just the company’s sector, but also its growth outlook, risks, profit margins, and even market cap, to estimate what a justified multiple should be for Duolingo specifically. For Duolingo, this Fair Ratio is 38.8x, which is much lower than its current multiple.

Because Duolingo’s actual PE ratio is substantially higher than this custom benchmark, the shares appear overvalued using this method.

Result: OVERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover companies where insiders are betting big on explosive growth.

Earlier we mentioned that there is an even better way to understand valuation, so let’s introduce you to Narratives. A Narrative is a simple, intuitive way for investors to link their perspective on a company’s story to their own assumptions about its future. This includes factors such as how fast revenue might grow, what profit margins could look like, and what that means for fair value. Narratives help you go beyond the numbers by connecting your view of Duolingo’s opportunity and risks with a personalized financial forecast, making it much easier to understand whether the stock is attractively valued or not.

You do not need to be an expert to use Narratives. Millions of investors use this feature on Simply Wall St’s Community page, where you can build your own Narrative or compare others’ perspectives. Narratives give clear, actionable signals by directly comparing each user’s Fair Value to today’s market price, and automatically update if something major changes, such as new product launches or earnings reports. For example, some investors may see Duolingo’s international expansion and growing AI-driven features and set a bullish Narrative with a fair value as high as $600, while others might emphasize regulatory hurdles or slowing growth, setting a more cautious Narrative with a fair value of just $239.

Do you think there's more to the story for Duolingo? Create your own Narrative to let the Community know!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Companies discussed in this article include DUOL.

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