Company Information
Share Price: $94.10
Market Cap: $3.65B
IPO Date: July 2021
Shrs Ostd: 40 million
Target Price: $116.42
Upside: 23.42%
Performance – 1Y
Company Background: Duolingo (NASDAQ: DUOL) is a premier online learning app. It is known for its gamification approach to learning languages, becoming the topgrossing app in the Education category on both Google Play and the Apple App Store. Their products include Duolingo; early learning Duolingo ABC app; and the Duolingo English test, an English proficiency exam whose certificate is accepted at over 4,000 institutions Their financials reflect heavy investment in product development, which will be a key contributor to future success. Furthermore, their expansion into a variety of learning spaces is something to keep an eye on for this growth stock.
Thesis 1: The Influence of Media in Driving User Expansion
Not only is Duolingo known for its practical use, but its potential for entertainment allows it to reach a wider user base than just language learners. In July 2022, Duolingo partnered with HBO to add key phrases to their “High Valyrian” course in anticipation of the Game of Thrones prequel release on the streaming platform. With more partnerships like this in the future, Duolingo has the potential to reach an even broader user base of media consumers who do not use the app for its primary purpose and increase premium subscriptions. About 1% of users are learning these languages, and there is potential to grow. Thesis
2: The Gamification of Language Learning Increasing Top-Line Growth
Revenue by Segment
Duolingo’s unique approach to language learning is what sets it apart from competitors. They make 72% of their profit from premium subscriptions, and while under 7% of users are actually subscribed, their in-app purchases such as “streakfreezes” and “time boosts” are a source of income that leverages their gamification approach and “freemium” business model. This model keeps its users engaged, and with future additions to this arsenal of in-app purchase, top-line growth can be expected.
Thesis 3: Continual Product Development Maintaining Their Brand and Increasing Future Market Share
Number Daily Active Users
With users completing 500 million exercises per day, Duolingo has large amounts of data that can be used to improve efficiency and efficacy. Their iconic owl and graphics that make the app unique can be designed quicker, due to their acquisition of Gunnar Animation, not only improving the existing app but also further developing their early learning “Duolingo ABC” app as well as their “Duolingo Math” app. Finally, Duolingo’s implementation of artificial intelligence to improve usability and customize exercises for each user will continue to enhance the user experience. By using their own technology as well as products like GPT-3 from OpenAI to improve grammar lessons and exercises the app will become more appealing; in fact, Duolingo saw a 62% increase in daily active users (DAUs) in 2022.
Valuation: An Equity multiple is a better representation of growth seeing as Duolingo has negative EBIDTA. Taking a P/S ratio of 11.68x and a projected annual growth rate of 25%, we get a target price of $116.14, indicating a 23.42% upside.
Risks: Industry Competition and App store dependency Duolingo is in a highly competitive market. There is a variety of free apps that serve the same purpose (teaching people languages) and while only about 7% of users are premium subscribers, Duolingo’s overall userbase is key to their success They are also dependent on app store policies, though it is the unpredictability that makes this risky.
