Stock market legend Peter Lynch coined the term “10-bagger” in his book One Up On Wall Street. This is a share that multiplies one’s original investment tenfold.
It’s very rare that a stock goes up 10 times in value in a single year. But there are loads of examples of stocks rising that much (or more) over time.
But how do I try spot the next one? That’s the theme I’ll be exploring here.
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A 1,000-bagger!
Imagine investing in Amazon at a split-adjusted $0.16 per share in 1997. Or Nvidia shares at a split-adjusted $0.164 in 2005. With each stock now at $224 and $134, the returns would be truly enormous.
Indeed, Amazon would be more than a 1,000 bagger!
Believe it or not, these are real-world returns for The Motley Fool co-founder David Gardner.
Now, imagine he actually shared his own investing framework that helps him find such monster stocks market winners… The great news is that he has, repeatedly.
The framework
According to Gardner, there are six traits to looks out for:
- Top dog and first mover in an important, emerging industry.
- A sustainable competitive advantage.
- Strong past share price appreciation.
- Visionary management (often founders).
- Strong brand (either business-to-consumer or business-to-business).
- Very overvalued according to the financial media.
Looking at my own portfolio, the best-performing shares (including a couple of 10-baggers) have all or nearly all of these traits.
Here’s a stock that ticks these boxes, and one I’m seriously considering buying in 2025.
The insistent green owl
The share I’m talking about is Duolingo (NASDAQ: DUOL), the company behind the gamified language-learning platform.
Founded in 2011, Duolingo was one of the early pioneers in app-based education. It’s now the global leader (top dog), with 37.2m daily and 113.1m monthly active users.
According to Global Market Insights, the global language learning market is projected to reach approximately $317.3bn by 2032, up from $61.5bn in 2023. So this is a massive emerging market.
Since listing in 2021, the stock is up 144% (strong price appreciation), and is led by founder Luis von Ahn. He’s a computer scientist who co-invented the website security programme Captcha (so quite smart).
Strong brand? Definitely. Conventionally overvalued? The forward price-to-sales (P/S) ratio is around 16, so that’s another tick.
The company offers both paid subscriptions and ad-supported ‘freemium’ options. So one risk here is the emergence of an AI-powered competitor offering advanced features for free that Duolingo currently charges for.
But as a paying subscriber myself, chipping away at my Spanish lessons with an 87-day streak under my belt, I haven’t seen better rivals. And in an age where parents worry about apps, Duolingo is one I’d be glad to see my daughter using daily.
As von Ahn says: “We want parents to feel good about giving their kids this app.”
What’s really exciting here is that Duolingo’s market cap is just $15bn. To me, that seems low for a leading company pursuing a $300bn+ market opportunity, with a foothold in every country in the world.
The app now offers maths and music courses, as well as 40+ different languages, including the fictional High Valyrian from Game of Thrones.
I could be wrong, but I think Duolingo stock has what it takes to be a 10-bagger in the long run.
