When you see that almost half of the companies in the Consumer Services industry in the United States have price-to-sales ratios (or "P/S") below 1.4x, Duolingo, Inc. (NASDAQ:DUOL) looks to be giving off strong sell signals with its 14.3x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

What Does Duolingo's Recent Performance Look Like?

Recent times have been advantageous for Duolingo as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Duolingo's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Duolingo's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered an exceptional 43% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 205% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 32% over the next year. With the industry only predicted to deliver 13%, the company is positioned for a stronger revenue result.

With this information, we can see why Duolingo is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our look into Duolingo shows that its P/S ratio remains high on the merit of its strong future revenues. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 2 warning signs for Duolingo you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.