(Reuters) -Duolingo shares surged nearly 30% before the bell on Thursday, after its annual forecast increase buoyed investor confidence in its ability to drive user growth through AI features and social engagement, while enhancing monetization.

The company is maintaining user growth by experimenting with app features, using social engagement strategies and optimizing its subscription offerings to retain users and attract new ones.

Duolingo runs experiments to determine which of its subscriptions are shown to which user and when, with the goal of maximizing long-term platform value rather than pushing any single plan.

Average revenue per user grew 6% in the second quarter, driven largely by users migrating to Duolingo's higher-priced Max tier, which offers features such as AI-powered video calls for practicing conversational skills. It also saw growth in its $12.99-per-month Super plan.

"While we maintain a more cautious stance on near-term user growth, we see several sources of upside still in the model, most notably across monetization efforts (price and improving paid conversion) and margins," Raymond James analysts said in a note.

Duolingo's gross margin declined 100 basis points during the quarter, less than the 300-basis-point fall it had anticipated, due to lower-than-expected AI costs and stronger performance in ads business.

"We did better on gross margin, in part because AI costs that power Max were lower than we expected, the cost of calling AI tools has come down a lot," Chief Financial Officer Matt Skarupa told Reuters.

The company posted adjusted profit per share of 91 cents, surpassing analysts' estimate of 58 cents, prompting them to boost earnings expectations.

It is set to add roughly $4.6 billion to its $15.62 billion market valuation, if premarket levels hold.

Still, as of Wednesday's close, Duolingo shares traded at 85.21 times profit expectations before the results, above internet services companies such as Uber's 26.54 and DoorDash's 79.38.