Duolingo, Inc. (DUOL), a standout in the consumer discretionary sector, leads the digital language learning market with its innovative and engaging approach. With its iconic green owl mascot, Duolingo has gamified language learning, turning vocabulary and grammar lessons into an addictive game-like experience. Leveraging a freemium model, the company offers lessons in over 40 languages and has seen rapid growth in both user base and paid subscriptions.
Duolingo’s secret sauce? A blend of cutting-edge technology and gamification. By applying AI to personalize the learning experience, Duolingo keeps its 97.6 million monthly active users hooked. Their lessons are accessible anytime, anywhere via smartphones, transforming idle moments into productive learning opportunities. This approach has not only pulled education out of the classroom but also placed it right at our fingertips.
Expanding User Base
DUOL’s strong user engagement is evident by its impressive growth in daily active users, which reached 31.4 million in the first quarter, a significant increase from 20.3 million the previous year. Moreover, the number of paid subscribers has soared by 54% year-over-year, totaling 7.4 million (with the proportion of paying users increasing from 8% to 8.6%). Clearly, learners are more than willing to pay for the premium experience.
Duolingo’s Innovations in Learning, Now With AI
Beyond language learning, Duolingo is expanding into new educational territories, including Mathematics and Music, using the same gamified, engaging format. Last year, Duolingo launched a multi-subject app experience, integrating a new Music course and an updated Math course into its flagship app. This allows learners on iOS to seamlessly switch between learning a language, honing their math skills, or diving into the world of music. This expansion not only adds value but also attracts a wider audience, increasing daily practice and user retention.
But it doesn’t stop there. Building on its commitment to innovation, Duolingo has recently introduced AI-driven features to enhance the learning experience. With the launch of its premium subscription tier, Duolingo Max, users gain access to two powerful AI tools designed to accelerate language proficiency.
One of them is Roleplay, an AI chatbot that facilitates conversational practice in the user’s chosen language by providing real-time feedback and guidance. Meanwhile, the other Explain My Answer offers personalized feedback on mistakes made in each lesson, enhancing comprehension and retention.
As the company continues to evolve its platform, we can expect more AI-based learning tools to enhance the user experience further and drive subscription growth. Further, these innovations mark just the beginning of Duolingo’s long-term growth potential.
Financial Performance
In the first quarter that ended March 31, 2024, DUOL’s net revenues increased 44.8% year-over-year to $167.55 million, with a 53% growth in its subscription revenue of $131.69 million. Its gross profit grew 45.4% from the year-ago value to $122.36 million.
The company’s operational performance also witnessed a significant turnaround, with income from operations amounting to $16.44 million compared to a loss of $8.52 million in the previous year. In the March quarter, DUOL achieved its highest quarterly adjusted EBITDA, which increased by $28.90 million year-over-year to $44.01 million.
Moreover, its net income was $26.96 million or $0.57 per share, compared to a net loss of $2.58 million or $0.06 per share in the previous year. The uptick in margins and profits signifies that Duolingo is capitalizing on economies of scale, attracting millions of new users and successfully converting them into paying subscribers.
As of March 31, 2024, its cash, cash equivalents, and restricted cash amounted to $832.45 million, reflecting a 29.8% increase from the prior-year period. Also, its free cash flow improved by 176.5% from the prior-year quarter to $79.62 million.
Furthermore, the company comprehensively surpassed Wall Street’s EPS and revenue estimates. For the first quarter, DUOL’s earnings per share was 119.2% above the consensus estimate, and its revenue was higher than the analysts’ estimates by $1.90 million.
Optimistic Outlook and Analysts Forecasts
Duolingo is optimistic about its revenue and earnings growth in 2024, driven by strong user engagement and the rollout of new monetization strategies. Second-quarter revenues are projected between $175 million to $177.5 million, with adjusted EBITDA to be in the range of $36.8 million to $39.1 million.
For the full year, the company foresees revenues in the range of $726.5 million to $735.5 million, with adjusted EBITDA estimated between $167.1 million to $176.5 million. Additionally, total bookings are anticipated to reach highs of $181.5 million in the June quarter and $817.5 million for the year.
The consensus revenue estimate of $177.02 million for the fiscal second quarter (ending June 2024) represents a 39.6% increase year-over-year. The consensus EPS estimate of $0.28 for the current quarter indicates a 252.8% improvement year-over-year. The company has an excellent surprise history, surpassing the consensus revenue estimates in each of the trailing four quarters.
Looking ahead, analysts forecast a 38% and 344.2% year-over-year increase in DUOL’s revenue and EPS for the current year (ending December 2024), projecting figures of $732.95 million and $1.55, respectively. For the fiscal year 2025, revenue and EPS are forecasted to grow by 27.4% and 52.7% year-over-year, respectively.
Impressive Historical Growth
Duolingo stands out as a leading growth stock with a focus on innovation, efficient marketing strategies, and strong unit economics. Over the past three years, DUOL’s revenue has grown at a CAGR of 45.6%. In addition, the company’s total assets have grown at a CAGR of 82.1% over the same period, and its levered free cash flow has improved at a 79.9% CAGR.
Why Did Duolingo Plunge Post-Earnings?
Despite an impressive performance in its recent earnings report, the company witnessed the steepest single-day decline, falling nearly 20%. Investors seemed spooked by a slight slowdown in the growth of daily active users, slipping from a robust 65% year-over-year surge in the previous quarter to a 54% uptick in the first quarter of 2024. Similarly, paid subscription growth softened from 57% to 54%.
Duolingo’s lofty valuation adds to the pressure, as its forward Price/Sales ratio stands at 10.50x, significantly above the industry average of 0.87x. Similarly, its forward EV/Sales ratio of 9.44x exceeds the industry norm by 671.8%, and its forward non-GAAP P/E ratio of 46.69x is 193.3% higher than the industry average of 15.92x.
Nonetheless, shares of DUOL have gained nearly 36% over the past nine months and more than 20% over the past year.
Bottom Line
Duolingo’s impressive user growth, revenue, and earnings underscore its dominance in the global learning market. As the market for digital language learning is poised to surpass $101.94 billion in 2032, the company’s revenue forecast for the year barely taps into its full potential. That means Duolingo has more room for growth. Moreover, with the anticipation of interest rates stabilizing or decreasing in the near future, Duolingo could become an attractive investment for growth-oriented investors again.
With a track record of innovation, efficient marketing, and strong profitability, Duolingo is well-positioned to seize opportunities in 2024 and beyond. Therefore, considering its strong fundamentals and growth prospects, investing in DUOL could be wise now.
