Duolingo Stock Is Due For a Recovery

Duolingo (NASDAQ: DUOL) is proof that a business can have solid fundamentals but a waning stock price. The green bird hasn't fared well with its 38% year-to-date decline, but the edtech company presents a compelling opportunity.

All of the right numbers continue to trend upward, and that should eventually reflect on the stock price, which trades at a 15.7 forward price-to-earnings (P/E) ratio.

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Duolingo continues to attract new users and boost its revenue

High revenue growth is one of the hallmarks of a successful growth stock, and Duolingo checks that box. Revenue increased by 27% year over year as the app reached 56.5 million daily active users, which is up by 21% year over year. The edtech company also reached 12.5 million paid subscribers, a 21% year-over-year improvement.

High user growth and revenue gains, combined with a rising net income, are signs of a healthy company. It comes as Duolingo makes changes to its app in an effort to drive "long-term engagement and loyalty."

Duolingo recently changed its app to incorporate more speaking practice, instead of users just clicking on the correct answer. The company said in its first-quarter presentation that this change is "critical for developing conversational skills" in a target language. Better results can boost retention and prompt Duolingo customers to learn additional languages on the app.

The AI software apocalypse is substantially overdone

Duolingo was one of many victims of the "AI SaaS Apocalypse," which took place earlier this year. Anthropic's Claude Cowork plug-ins could perform advanced workflows autonomously, and some people thought it would be the end of many software companies. As a result, Duolingo stock took a massive hit. Although the narrative has recently revolved around the possibility of artificial intelligence making Duolingo irrelevant, the fundamentals present a different picture.

This mismatch will become clearer in the months ahead, and Duolingo's Q1 shareholder letter further pointed out this disconnect. The edtech company told investors it was using AI tools to "fundamentally change how quickly [they] can create content." This omission indicates that AI is a catalyst for Duolingo instead of a threat. It's even translating into better fundamentals.

"We can now push changes across many courses at once and improve quality more quickly and consistently. This is already improving engagement among new users," Duolingo said in its shareholder letter.

While investors can argue that Duolingo was overvalued when it traded near $600 per share, it's harder to make that same case now that Duolingo barely trades above $100 per share. One year ago, Duolingo had a forward P/E ratio well above 100, but its current 15.7 forward P/E ratio suggests that it is due for a comeback.

Marc Guberti has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Duolingo. The Motley Fool has a disclosure policy.