Sales-and-marketing spend was just $27 million, roughly 12% of revenue, underscoring how little Duolingo relies on paid acquisition. In my view, Duolingo remains one of the best experts of high?impact marketing. This quarter's Duo Owl fakes his own death' social campaign generated an estimated 1.7 billion impressions worldwide without meaningful media spend, driving strong user acquisition and brand engagement.

Source: Duolingo Shareholder Letter

On margins, the expansion of Duolingo Max continues to apply modest pressure. Gross margin dropped about 190 basis points (bps) to roughly 71.1% as GenAI costs in Max outpaced the mix shift toward higher-margin subscriptions. Yet because Max subscribers pay more, total gross profit dollars rose strongly, highlighting that a lower margin percentage does not necessarily mean less cash generation. Management expects this trend to continue in Q2 and accelerate in Q3 and Q4. Indeed, operating margin improved 40 bps to 10.2%, and GAAP net income reached $35 million, or $0.72 per share, comfortably ahead of estimates. Free cash flow (FCF) of $104 million in the quarter works out to about $0.80 per MAU, or 45% of revenue. When combined with 38% top-line growth, delivers a Rule of 40 score in the low-80s, a rare showing for a fast-growing consumer tech company. The balance sheet is stellar, with $1?billion in cash and marketable securities and no debt.

Stock-based compensation was $31 million, or about 13% of revenue, leading to only a 2% increase in share count year-over-year. That equity spend has been carefully managed even as Duolingo scales up its AI and product teams.

Finally, even amid geopolitical turbulence, demand for language study keeps rising. Management lifted full?year 2025 revenue guidance to a midpoint of $991 million, and a modest beat would push Duolingo past the $1 billion mark.

New Growth Areas

GenAI

Generative AI has prompted questions about whether AI tutors will render Duolingo obsolete. In my view, the opposite is true. AI is the fuel that powers Duolingo's next phase of growth to become an even better, more efficient company.

Duolingo has invested heavily in AI to generate and personalize content. CEO Luis von Ahn has made it clear that every member of the organization now works alongside AI tools to streamline routine tasks and focus human effort on higher-value work. Behind the scenes, Duolingo's Birdbrain engine analyzes billions of data points from daily lessons to refine and personalize content in real time.

At the content-creation level, AI dramatically slashes both the time and cost required to build new courses. Duolingo uses AI to run millions of A/B tests, draft example sentences, generate conversational prompts, and even craft detailed explanations for answers. These capabilities underpin premium features like Duolingo Max's Explain My Answer and Roleplay chat, which not only enrich the learning experience but also justify a higher subscription price.

For example, Duolingo is working heavily on making Video Call with Lily a more immersive experience and bolstering retention. It's adding new improvements that let users review past conversations, receive and replay voice messages from Lily, and explore a fully 3D environment with interactive objects for users to engage with.

Once the core app framework is in place, plugging in an entirely new subject or language requires only incremental effort. In April, Duolingo added 148 new language pairings, enabling, for example, a Portuguese speaker to learn Korean directly rather than routing through English. AI automates the bulk of translation, example generation, and localization, meaning Duolingo can expand its catalog faster than any traditional publisher.

This rapid, low-cost rollout of high-quality content is, in my view, Duolingo's greatest moat. Smaller rivals simply cannot match the speed or scale at which Duolingo, backed by AI and continuous A/B testing, brings new learning experiences to millions of users around the world.

New Frontiers

Duolingo has demonstrated optionality through its expansion beyond languages into new learning verticals. After rolling out math and music, the company is now preparing to launch chess in 2025 for English-speaking iOS users. The origin story of this course underscores Duolingo's AI advantage as CEO Luis von Ahn described, two team members with neither programming nor chess experience who used generative AI to prototype the entire curriculum. Once they had a solid draft, a dedicated team refined and polished it for public beta, demonstrating how AI can slash development time and cost.

I should mention something amazing about the chess is that it really started with a team of two people, neither of whom knew how to program, so they were not programmers and they basically made prototypes and did the whole curriculum of chess by just using AI. Also neither of them knew how to play chess -- and we started that for several months. And eventually, when they had a really good prototype, we had a whole team to professionalize it and put it in the app. So we're very happy with it. This is, at the moment, mainly going to be to increase users who we think there's a huge demand for chess. There's hundreds of millions of people who want to play chess.

The course uses interactive chess puzzles and mini-games to teach concepts. For example, a lesson might ask you to move a knight to the correct spot to practice the L-shaped move, or solve a checkmate puzzle with a king trapped in a corner. Users can even play mini-matches or full chess games against a Duolingo AI coach named Oscar as they progress. In my opinion, Duolingo is applying the same formula it uses for language lessons, short sessions, fun exercises, immediate feedback, and leveling up, to the game of chess. While the gamified approach is similar, the content domain is entirely new. Instead of vocabulary and grammar, the chess course teaches moves, tactics, and strategies. That differs from language learning, where direct application (conversation) often happens outside the app. Chess also allows Duolingo to introduce new kinds of interactive content (like an AI opponent) that weren't part of language lessons.

Moving into subjects like chess could attract users who aren't currently using Duolingo. For instance, someone not interested in learning a new language might still be interested in improving their chess skills through a fun app.

By entering the chess arena, Duolingo can attract users who may never have been drawn to language learning. Chess.com, with over 211 million members, currently dominates the market by offering lessons, computer opponents, and online play. Chess.com's advantage, beyond its massive member list, is that users can play against human opponents, a feature Duolingo could add to create an interactive, competitive experience on its own platform, in my opinion.

For those who doubted Duolingo's optionality beyond languages, this multi-subject strategy offers clear proof of concept. Each new vertical, whether math, music, or chess, not only broadens the addressable market but also deepens engagement and cross-sell opportunities. Imagine a family plan where one member practices Spanish, another tackles algebra, and a child learns chess, all within the same app. While these non-language cohorts are still small, they are expanding faster than the core language business.

Competitive Positioning and Valuation

While Duolingo lacks a direct public competitor, many apps compete with Duolingo, even so, it remains the top pick.

A public competitor in the educational space is Chegg (NYSE:CHGG). Chegg is an education company that originally focused on textbook rentals and now on subscription homework help (Chegg Study). Product-wise, Chegg is about answering specific academic questions (think problem solutions, tutoring, writing help), primarily for high school and college students. It's less of a learning platform and more of a study aid. The rise of free AI tools like OpenAI's ChatGPT directly threatened Chegg's value proposition in 2023, causing a sharp drop in its growth. Engagement for Chegg is need-based, not habit-based, meaning that a student might subscribe for a semester to get through a tough course, then cancel. By contrast, Duolingo has users who stick around for years, continuously learning.

Another example is Babbel, a language?learning app similar to Duolingo that planned an IPO in 2021, but canceled late that year as the business model failed to woo investors.

These examples underscore how difficult it is to sustain daily engagement in educational software, and they show why I believe Duolingo's mix of network effects (more users -> more data -> better AI -> better product -> more users), AI-driven personalization, and gamification creates a durable moat.

That said, Duolingo continues to trade at a premium. The stock is currently priced at a P/S multiple of 27x, with a forward P/S of about 21x and a price-to-FCF ratio of 75x. Despite the company's robust growth, these metrics are now sitting above the company's historical range and are getting difficult to justify. The PEG ratio, on the other hand, remains under 2 at 1.65x, suggesting investors are still paying a reasonable premium for high-teens growth.

Source: Gurufocus

In my updated model, I incorporate the raised 2025 revenue guidance, then assume that growth gradually slows down. I build in near?term margin pressures while anticipating that continued innovation, including enhancements to Lily and expansion into new verticals, will help restore and even improve margins over time. Under these assumptions, I raised my price target to $360 per share, but, after the recent run, it implies roughly 25% downside.

Source: Author

From a Guru's perspective, billionaire investor Ron Baron (Trades, Portfolio) opened a position in Q3 2024. Ray Dalio (Trades, Portfolio) added to his stake in Q4 2024, both signaling confidence in Duolingo's unique combination of engagement and monetization. On the other end, Baillie Gifford (Trades, Portfolio) trimmed its stake by 14% but still owns over 6% of shares outstanding, evidence that many gurus remain committed to Duolingo's growth story even as they rebalance portfolios.

Risks

I can't overlook the challenges Duolingo faces as it stretches beyond its language roots. First, execution risk is real. Chess, math and music must prove they can match the habit-forming engagement and learning outcomes that made language courses so sticky. If retention in these new verticals disappoints, the cross-sell and engagement benefits will fall short of expectations.

Second, each subject brings entrenched competition. Chess.com already has over 211 million members, math learners have a wealth of options from Khan Academy to STEM-focused apps, and music education platforms vie for the same users. Duolingo's gamification edge must be strong enough to lure consumers away from these specialist incumbents.

Finally, Duolingo's valuation already reflects lofty assumptions about future growth and margin expansion. With premiums built on continued outperformance, any shortfall in execution, user engagement or profitability could trigger a sharp share-price correction.

My Final Take

Duolingo's expansion into chess, math and music underscores just how much optionality lives in its platform. What began as a simple language app is fast evolving into a gamified learning platform that spans multiple disciplines.

Overall, Q1's results showed that Duolingo's engine is firing on all cylinders. Revenue continues to grow near 40%, paid subscriptions just crossed 10 million, and free cash flow remains extraordinarily strong. These metrics confirm that Duolingo has truly cracked the code on habit-forming education. If new verticals like chess, math and music gain traction, they'll open the door to fresh user segments and new revenue streams without a proportionate rise in costs.

That optionality comes with execution and valuation risks, which I've outlined above, but I continue to view today's share price as reflecting not just the strength of the core language business but the promise of a multi-subject learning platform. I remain confident that Duolingo is ahead of its peers, however, in my view, the stock overshot after a great quarter. I intend to remain a shareholder, considering a modest trim to lock in some gains after this strong rally, because I believe Duolingo's blend of AI, engagement, and network effects offers long-term upside that few public companies can match.

This article first appeared on GuruFocus.