A Member of Pat McKeough’s Inner Circle recently asked for his advice on Duolingo – a company that’s one of the leading language learning apps with over 800 million downloads.
Pat likes the firm’s strong brand recognition and steady growth in active users, revenues and earnings. The firm is also being innovative with new product offerings. However, Pat cautions that the shares are priced at a very high valuation relative to earnings and could be very volatile, especially with plenty of competition in the field.
Duolingo Inc. (Symbol DUOL on Nasdaq; www.duolingo.com), is the top-grossing education app on Google Play and the Apple App Store. It has more than 800 million downloads.
Founded in 2011, the company offers courses on over 40 distinct languages—from the world’s most spoken, such as Spanish and French, to endangered languages like Hawaiian, Navajo and Scottish Gaelic. It also offers fictional languages from TV shows like Star Trek and Game of Thrones.
The company has a “freemium” business model: the app and the website are accessible free of charge, although Duolingo also offers a premium service, Super Duolingo (formerly called Duolingo Plus), for a subscription fee. Duolingo has locations in the U.S., China and Germany.
Notably, the company believes that there are more people in the U.S. learning languages on Duolingo than there are foreign language learners in all U.S. high schools combined. In addition, there are more people learning certain languages on Duolingo, such as Irish and Hawaiian, than there are native speakers of those languages worldwide.
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Duolingo went public on July 27, 2021, selling shares through its IPO for $102 each. The company started out as a hot new issue. It initially set its proposed IPO price at $85 to $95 but was able to raise that on anticipated demand for its shares. It doubled in price within little more than a month.
Revenue rose 47.3%, from $250.8 million in 2021 (the business’s first year as a public company) to $369.5 million in 2022. In 2023, revenue rose 43.7%, to $531.1 million. Duolingo lost $60.1 million, or $1.52 a share, in 2021. In 2022, it lost $59.6 million, or $1.51 a share. In 2023, the company made $16.1 million, or $0.39 a share.
Inner Circle: Duolingo’s business and share price strengthens with innovation a key contributor
For the quarter ended September 30, 2024, revenue was $192.6 million, up 39.9% from $137.6 million a year earlier. More specifically, subscription revenue grew by 48.9%, to $17.6 million, and now accounts for 82% of overall revenue.
Daily active users (DAUs) rose 53.7%, to 37.2 million from 24.2 million while monthly active users (MAU) grew 36.1%, to 113.1 million from 83.1 million.
Duolingo had 8.6 million paid subscribers at the end of the latest quarter, 48.3% higher than 5.8 million a year ago. The company’s paid subscribers as a percentage of MAUs was 7.6% of the total.
Duolingo generated a profit in the latest quarter of $23.4 million, or $0.53 a share, up sharply from $2.8 million, or $0.07 a share.
The stock shot up to around $198 shortly after the IPO. It then fell to as low as $60 in 2022. However, the shares are up 55.2% over the last year and are now well above the IPO price.
Its business prospered during the pandemic, and the company now appears to be building on that rapid growth. It remains the leader in language instruction, but to keep growing, it must keep successfully expanding in its highly competitive market.
One way it’s doing that is through developing new products. For instance, it recently announced the launch of Duolingo Max, a higher tier subscription that harnesses the power of generative AI. Duolingo Max aims to give subscribers an even more engaging way to learn by chatting with Duolingo characters and receiving personalized explanations of the learner’s mistakes.
The company has also announced a strategic shift to a multi-subject product, with the addition of math and music courses to the mobile app. Moreover, management has announced a new curriculum designed for English learners at more advanced levels of language proficiency.
Recommendation in Pat’s Inner Circle: Duolingo Inc. is a hold.
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