Duolingo Stock Analysis

Updated: Feb 7

For years I've been a big fan of Duolingo and I was delighted to see it go public in July 2021. But I am not an investor yet even though I love investing in companies that have a product I use constantly, and Duolingo is at the top of that list, to the point that my streak is 840 days now or 2.3 years straight!



But, as a semi hard rule, I don't invest in IPOs an usually prefer to wait a minimum of two quarters before I invest.


But before! Are you on the Aconomics list? Get on it!



Now. Lets take a look at Duolingo:


Duolingo Stock Analysis:

  1. Duolingo Mission and Founder

  2. Duolingo Business Model

  3. Duolingo Financials

  4. Risks and price

  5. Duolingo Price targets

 


Duolingo Mission and Founder


Duolingo was founded in 2012 and went public in 2021. I, as you can see, have been an avid user and was really looking forward. The founder and CEO is one of the reasons I even got into Duolingo.


Luis Von Ahn is one of those people that has the vision, IQ and work ethic to see a problem and find awesome solutions that become the standard. He created something we all have used many times, reCaptcha.


Born in Guatemala, studied in Carnagie Mellon and sold reCaptcha to Google before founding Duolingo, a company now worth over 3 Billion dollars that stands now in the crossroads, and we'll see why.


According to their latest Earnings Call Presentation, their mission is:

To develop the best education in the world and make it universally available.

Interesting that they are not talking about Language right?




Duolingo Business Model


They have been developing their software and gamifying it to perfection. To the point that over 500 million people have downloaded Duolingo since 2012. That's a lot of people!


But how are they monetizing their users?

Well, only around 10% of those 500 million are MAU (Monthly Active Users) and the company has 4 ways of monetizing:

  1. Subscription: Users wanting the full experience without learning restrictions. This is aprox. 73% of revenue.

  2. Ads: As any freemium model, the users that don't pay get to see Ads between the lessons and this only counts for 15% of revenue.

  3. IAM or In-App Purchases: A very recent development to allow users extra features without a monthly payment, this only counts for 2%.

  4. Duolingo English Test (DET): The surprise of the company for me. This tests that are being accepted by thousands of institutions are now responsible for 9% of the revenue.



Duolingo Financials


The good thing about the numbers of a company is that they tell a story and Duolingo is a perfect example of this.


We already know that out of the 500 million people that downloaded the app, only 41 million use it monthly. That means that Duolingo is fighting to retain users and Churn is very high. But this shouldn't surprise us, Language learning is inherently a high-churn business! And this brings us back to:

  • Removing the word "Language" from the mission statement.

  • Spending a lot on R&D to leverage their tech and growth into more sustainable sectors in education.

  • Hiring for this new vertical or verticals.


Now, financials tell us that Duolingo is growing but they are also investing a lot in this pivot or expansion of their user base through new verticals:

  • R&D expenses are 29.35M from 63.60M in Revenue. That's 46%!

  • Double Selling and Admin expenses in 1 quarter to 44.87M.

And their margin is an incredible 71.6%.


It goes without saying that they are really making an effort in growing the user base, growing the subscription business and are investing a lot in creating this new verticals that will lower their churn rate and make them more sustainable and profitable in the long run.


I for one, think they will be very successful because they have mastered the gamification of learning and if they can translate that to math, calculus, algebra, physics, economics, etc. A ton of people would want to finish those trees (learning trees).


I took the liberty of pushing it :)


Risks and price


I hope it was clear that I really like Duolingo as a user but sadly, as an investor I'm not there yet. I'm already paying them monthly and I hope they can achieve their objectives of replicating their tech in other fields.


The valuation as it stands today is 3.96 Billion usd.

The Short Interest stands at 4%

Stock price is barely above 100 usd starting the year 2022. Down from 202 usd in September and around the original IPO price of 102.




Duolingo Price targets


The mean Target Price from 6 analysts stands at 177.83 for the next 12/18 months.


I consider this very ambitious, especially if we're seeing rate hikes by the FED and a lingering inflation. High PE and unprofitable companies will see their valuations shrink unless they can outperform the market and surprise analyst by betting expectations in every quarter.


I'll be keeping an eye on Duolingo expecting them to make big moves towards sustainability and growth while confronting a tough 2022 market. In this situations many opportunities arise and maybe DUOL will be one of them!




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