Duolingo (NASDAQ:DUOL) is a growth stock I own in both my Stocks and Shares ISA and Self-Invested Personal Pension (SIPP) portfolios. However, both positions have now crashed 43% since May, wiping out paper gains they had generated.
But rather than panic, this just gives me a chance to scoop up more shares at a lower price.
Google risk
Duolingo is the world’s most popular language learning app. When I first considered the stock, I doubted whether the firm had a durable competitive advantage. I’ve seen education technology stocks flatter to deceive over the years, including Chegg and Coursera.
Currently, investors are worried that Google Translate has parked its tanks on Duolingo’s lawn by launching an artificial intelligence (AI)-powered practice mode. Having used it last week, I think it’s very impressive, especially for a tool that’s still in beta testing.
For example, I can generate my own practice scenarios in Spanish, like suggesting dinner plans or meeting a partner’s family. Duolingo’s lessons have limited freedom to choose scenarios. I don’t know whether that’s good (more structure) or bad (lack of personalisation).
Language learners like myself wouldn’t have much reason to go to Google Translate if Duolingo offered a similar translation tool. But it doesn’t, and this gap’s let in a serious potential rival.
Jumping ship too early
In 2011, Google launched Google+, a social media platform that was meant to compete with Facebook. It quietly shut this down in 2019, around the time TikTok appeared out of nowhere.
Anyone who dumped Facebook stock over these competitive fears would have lost out on terrific gains. Shares of Meta Platforms — as the firm’s now called — are up 180% in five years and 715% over a decade.
It’s a similar story with Netflix. Serious competition first arrived in the shape of Amazon Prime Video, then Disney+ and other streaming services. Yet, despite this competition, Netflix has remained as popular as ever and the stock’s up 1,000% in a decade.
Google owner Alphabet‘s another interesting example. Investors who sold a year ago due to the perceived threat from ChatGPT have missed out on a market-thumping 60% share price gain.
Clearly, giving up on a high-quality growth stock too early can be a serious mistake.
Nothing’s really changed
This isn’t to say that Duolingo won’t be disrupted by Google Translate or some AI app like ChatGPT. I think this is a potential risk.
But these hypothetical competitive dangers don’t change the investment case for me. I’m yet to see any weakness in Duolingo’s (impressive) key growth metrics.
Just last month, the firm reported that Q2 daily active users jumped 40% year on year to 47.7m. Revenue surged 41% to $252.3m, while paid subscribers rose 37% to 10.9m.
Meanwhile, net income rocketed 84% to $44.8m, despite heavy ongoing investments for growth. And Duolingo now sports a 37% free cash flow margin.
Finally, full-year bookings guidance was raised to around $1.15bn (32% growth).
We believe we’re still early in our user growth journey. We’ve delivered innovation while growing profitability.
Duolingo CEO Luis von Ahn.
Based on next year’s forecast revenue, the forward price-to-sales ratio’s 11. Not exactly cheap. But for me, nothing’s really changed here, except the stock’s suddenly 43% cheaper.
As such, I’ll be buying more shares soon.
