Every evening, I’m reminded by a big green owl to do my daily Spanish lesson. The guilt-trip works, as I’m soon clicking on the Duolingo (NASDAQ: DUOL) app to practice. The lessons are engaging and I think the firm is on to something powerful. So much so, I recently opened a small starter position in my Stocks and Shares ISA.
¡Hola, Duolingo!
The app was launched in 2012 with the aim of democratising language learning, making it available to anyone, anywhere. The founders are both computer scientists with backgrounds in AI.
Today, the company offers 40+ languages to more than 113m monthly active users worldwide. It operates an ad-supported freemium model, with paid subscription options.
Duolingo’s secret sauce is its ability to keep students motivated, which I can attest to with my own 124-day streak! It does this through gamified reward systems and playful cartoon characters, transforming grammar lessons (yawn) into something fun.
But this isn’t a trivial app for children. Powering the platform is artificial intelligence (AI) that personalises the learning experience to deliver superior outcomes and improved user engagement.
For example, the firm uses machine learning models to adapt lessons according to a user’s strengths and weaknesses. It can then tweak difficulty levels based on this data.
40% growth…¡increíble!
Growth is very strong. In Q3, revenue surged 40% year on year to $193m. Paid subscribers hit 8.6m, up 47%, while daily active users (DAUs) grew 54% to 37.2m.
Duolingo is investing for growth, so isn’t yet optimised for maximum profits. Yet it still achieved net profit of $23.4m and free cash flow of $52.7m in the quarter. This suggests the digital platform could be enormously profitable as it matures, assuming growth doesn’t stall or something better comes along, which are risks for any high-growth company.
Co-founder and CEO Luis von Ahn commented: “We performed superbly across all of our key operating metrics this quarter, with DAU and bookings growth exceeding our expectations.”
The reason I’ve only taken a small starter position here is due to the high valuation. After doubling in just six months, the stock is trading at a price-to-sales multiple of 21, based on 2024’s forecast revenue. That doesn’t present much wiggle room if, again, growth unexpectedly slows in 2025.
AI-powered
However, I’m backing the company to continue expanding, boosted by a new higher subscription tier (Duolingo Max) that it’s rolling out.
This has powerful AI features, including one that enables learners to have spontaneous video-call conversations with Lily, a sassy, purple-haired goth avatar with a signature deadpan demeanour. She even popped up on the Q3 earnings call!
My young daughter, who also loves Duolingo, likes to mimic Lily, sarcastically rolling her eyes and clapping slowly in mock enthusiasm to various things.
Massive market opportunity
There are an estimated 2bn people around the world actively learning a foreign language. Duolingo, which is quickly becoming synonymous with language learning in popular culture, only had 8.6m paid subscribers in Q3. So the growth opportunity appears vast.
Duolingo also offers maths and music courses, with a long-term goal to teach various subjects. Indeed, it aims to rival — or even surpass — human tutors.
Of course, it might never achieve that ambition. But if it does one day, the business will be worth a hell of a lot more than $16bn.
