Duolingo's Undervalued Long-Term Growth Potential: A Case for Durable Engagement and AI-Driven Margins

Duolingo, the language-learning giant, has emerged as a standout in the EdTech sector, leveraging AI-driven innovation and gamification to build a durable user base while expanding margins. Despite its recent valuation corrections, the company's strategic focus on engagement, coupled with its efficient AI-powered monetization model, positions it as a compelling long-term investment.

Durable User Engagement: The Foundation of Growth

Duolingo's ability to retain users hinges on its mastery of gamification and AI personalization. From 2012 to early 2023, user churn declined from 47% to 37%, a testament to the effectiveness of features like daily streaks, badges, and leaderboards. By 2025, the platform had further refined its approach, introducing chess courses, player-versus-player modes and LinkedIn integrations to broaden its appeal. These updates have driven a surge in power users-those engaging with the app more than 15 days a month-rising from 20% to over 30% of all users since 2022.

The AI component is equally critical. Tools like Explain My Answer, Roleplay, and Video Call with Lily (powered by GPT-4 and Birdbrain) create immersive, adaptive learning experiences that cater to individual user needs. This personalization not only enhances retention but also drives higher conversion rates to Duolingo's premium offering, Super Duolingo. As of 2025, 7% of MAUs subscribe to the service, with paid subscriber numbers reaching 10.9 million in Q1 2025.

AI-Driven Margin Expansion: Efficiency and Scalability

Duolingo's AI-first strategy has not only boosted engagement but also transformed its financial performance. Revenue grew by 40.84% year-over-year from 2023 to 2024, reaching $748.02 million, driven by AI-powered features like Duolingo Max. Operating margins improved dramatically, turning a $13.26 million loss in 2023 into a $62.59 million profit in 2024. While initial AI implementation costs temporarily pressured gross margins (dropping to 71.9% in one quarter), the company stabilized at 72.78% by 2024, outperforming the EdTech industry's average gross margin.

The efficiency of AI extends to content creation. By automating course development, Duolingo launched 148 new language courses in under a year, accelerating global expansion and reducing bottlenecks. This scalability has allowed the company to maintain a 73% gross margin, one of the highest in the sector. With 40.5 million daily active users (DAUs) and a 51% YoY DAU growth rate, Duolingo's AI-driven model is proving both sticky and profitable.

Valuation: A Premium Justified by Growth

Despite Duolingo's current valuation multiples appearing elevated-its P/E ratio of 19.93 and P/S ratio of 10.6 in 2025- the metrics remain attractive relative to its growth trajectory. The EdTech industry's average P/E is 15.95, while its average P/S stands at 8.1x. However, Duolingo's projected revenue growth of 35.8% in 2025 and 26.8% in 2026 far outpaces the sector's 13.3% CAGR. Analysts have raised the company's 2025 revenue forecast to $1.01–$1.02 billion, exceeding expectations of $996.6 million.

The company's operating margin of 12.9% in Q3 2025 also highlights its ability to scale profitably. While EdTech peers struggle with operational costs, Duolingo's freemium model-where 81% of revenue comes from subscriptions-ensures a high-margin, recurring revenue stream. This model, combined with AI-driven cost efficiencies, suggests Duolingo's margins will continue expanding as user acquisition scales.

Challenges and Opportunities

Duolingo is not without risks. Its focus on beginners and intermediate learners leaves room for improvement in catering to advanced users. Additionally, the company must balance its mission of free education with the financial reliance on subscriptions. However, its recent forays into LinkedIn integrations and professional certifications signal a strategic pivot toward monetizing skills beyond language learning.

Conclusion: A Compelling Long-Term Bet

Duolingo's durable user engagement, AI-driven margin expansion, and outperforming growth metrics make it a compelling investment. While its valuation multiples have corrected from historic highs, the company's ability to scale efficiently and innovate in AI-powered education justifies a premium. As the EdTech sector evolves, Duolingo's unique blend of gamification, personalization, and profitability positions it to outperform industry averages and deliver long-term value to shareholders.