Is AI Duolingo's Biggest Risk or Biggest Catalyst?

Gamified mobile learning company Duolingo (NASDAQ: DUOL) has been a market-crushing investment. The stock closed its first day of trading in 2021 at $139 per share. As of this writing, just four years later, it's trading at over $520 per share, up 276% and trading near an all-time high. For perspective, the S&P 500 is up just 34% during this time.

Duolingo is outrunning the market for at least two simple reasons. First, it's growing like a weed. Second, it's actually quite a profitable business. The end result is that skyrocketing profits are lifting the stock to higher and higher levels.

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The chart below shows that Duolingo's revenue is up more than its stock price. And its trailing-12-month free cash flow of $289 million is astronomically higher than when it went public.

DUOL data by YCharts

Duolingo's latest quarter was particularly impressive. In the first quarter of 2025, the company's daily active user base took a huge 49% year-over-year jump to 46.6 million. That's impressive enough. But paid subscriptions also had a huge 40% jump to over 10 million.

What's driving this impressive growth for Duolingo? It's undeniable that generative artificial intelligence (AI) is a contributing factor. The company is using generative AI to create new features and products. And those efforts appear to be hugely successful.

Image source: Duolingo.

So is generative AI Duolingo's biggest catalyst for growth? Or could it actually be one of its biggest risks? These are questions investors should certainly explore.

Is AI a benefit or a risk?

In its first-quarter letter to shareholders, Duolingo's management enthusiastically shared that it had launched "Nearly 150 new language courses for different geographies in Q1 using AI-generated content." Moreover, its bookings were higher than expected thanks to growth in its most expensive subscription tier, which is Duolingo Max -- the tier that offers special AI features.

Given its catalyzed growth rate, it would appear that generative AI is a net positive for Duolingo. But I believe there are some risks to the strategy that are worth considering.

For starters, Duolingo's AI content and features are built with large language models (LLMs) but these aren't proprietary to Duolingo. It's using widely available LLMs, including OpenAI's popular GPT-4. Its own machine-learning software uses these models to create the content. So there is some distinct technology at work. But the underlying LLM is available to any company that wants to use it.

Some have suggested that Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL) is a rising challenge to Duolingo because of AI. The company's Google Meet now offers real-time AI translation, preserving a speaker's tone and voice. Why learn another language when AI translates for you?

There's reason to downplay Alphabet's translation AI as a threat to Duolingo. For starters, Alphabet's AI Ultra subscription costs nearly $150 per month versus about $30 per month for Duolingo Max -- the cost difference is real. Moreover, some people enjoy Duolingo's gamified learning experience, which is something they'd forego with Google Meet's new features.

That said, I do believe Alphabet's AI translation announcement shows how quickly the space can change. Can another company replicate what Duolingo has built since launching its app in 2012? The possibility is less far-fetched today than it used to be, in my opinion.

Investors also shouldn't underestimate the potential impacts AI can have on the Duolingo experience. Launching 150 new products in a single quarter could be too fast to ensure quality. If AI cheapens the Duolingo experience in any way, the company may regret leaning in so strongly.

What does it mean for investors now?

Duolingo stock is too risky for me personally. What I've just described speaks to both the competitive risk and the execution risk. The competitive risk is elevated because generative AI could be quickly changing the language-learning space. And the execution risk is higher than normal because generative AI is new and Duolingo needs to learn and deploy it correctly.

Yet there's another risk as well: Duolingo's valuation risk. As of this writing, the stock trades at nearly 30 times its trailing sales. Not only is this high generally speaking but it's also high when compared to the usual valuation for Duolingo stock, as the chart below shows.

DUOL PS Ratio data by YCharts

If Duolingo only had the competitive risk or the execution risk, I might be inclined to give it the benefit of the doubt and invest anyway. But the added valuation risk gives me pause. If it slips at all due to the fast changes brought on by generative AI, the stock has a lot of room to come down due to its pricey valuation.

This doesn't mean that Duolingo stock will be a bad investment from here -- as mentioned, the business is absolutely booming right now. If this continues, there's reason to believe shareholders will make money. But when it comes to my own investment portfolio and risk tolerance, I'll stay on the sidelines with Duolingo stock for the reasons I've shared.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet. The Motley Fool recommends Duolingo. The Motley Fool has a disclosure policy.