Duolingo Speaks the Language of Growth for Investors

Duolingo Inc. (NYSE: DUOL) offers a freemium language learning platform that's taken the world by storm. It uses an incredibly simple, animated and gamified interface for kids and adults to engage in a cheerful, entertaining and inviting way to learn new languages. It uses little bite-sized, unintimidating lessons that users can consume in small bits at their own pace.

It's a Mr. Miyagi-like Karate Kid approach to learning languages where the user engages in activities that indirectly strengthen language learning skills. Generative artificial intelligence (AI) is integrated to offer personalized learning and explains users' mistakes through its explain my answer feature. This approach has driven its user base to more than 500 million learners worldwide.

This business services sector company competes with Chegg Inc. (NYSE: CHGG), Udemy Inc. (NASDAQ: UDMY) and privately held Rosetta Stone and Babbel. Duolingo has also joined the S&P 400 Mid-Cap index on April 22, 2024.

The Freemium Model Pays Off

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Popularized by free-to-play video games like Fortnite and Electronic Arts Inc. (NASDAQ: EA) Apex Legends, and the ad-supported model like Alphabet Inc. (NASDAQ: GOOGL) YouTube, the freemium model lures new users by enabling them to use free and pay to upgrade for premium features and an ad-free experience.

Duolingo also lets new users use the platform to learn over 40 languages completely free. However, the free version has lots of ads and limitations that can be alleviated in the premium version called Super Duolingo, priced at $12.99 per month or $59.99 prepaid for a year.

The premium service offers an ad-free experience and features like offline access to lessons, progress quizzes, and unlimited hearts, enabling you to continue lessons without worrying about being locked out after making too many mistakes. Duolingo also offers a Super Family plan for $119.99 per year.

Daily Descending Triangle

The DUOL daily candlestick chart illustrates a descending triangle pattern that commenced the upper descending trendline at the $245.59 swing high on March 21, 2024. The flat-bottom lower trendline formed at $194.00 as they meet at the apex. The daily relative strength index (RSI) is resting at the 42-band. Pullback support levels are at $184.00, $171.64, $155.72 and $140.16.

Hypergrowth is the Norm

Duolingo crushed Q4 2023 EPS estimates by 22 cents, reporting 26 cents versus 4 cents consensus analyst estimates. Revenues surged 45.4% YoY to $150.99 million versus $148.29 million. Total bookings rose 51% YoY to $191 million. Subscription bookings rose 57% YoY to $157.8 million. Paid subscribers grew 57% YoY to 6.6 million. Daily active users rose 65% YoY to 26.9 million, while monthly active users (MAUs) grew 46% YoY to 88.4 million.

Delivering More Upside Guidance

Duolingo raised its top-line guidance for Q1 2024 to $164 million to $167 million versus $159.35 million. Total bookings are expected to be between $186 million and $190 million. Full-year 2024 top-line guidance was raised from $717.5 million to $729.5 million versus $701.12 million consensus estimates. Total bookings are expected to be between $790 million to $802 million.

Upbeat CEO Commentary

Duolingo CEO and Co-Founder Luis von Ahn noted the stellar Q4 2023 as the company delivered record user growth, revenue profitability, free cash flow and bookings. Since going public in 2021, the company has achieved 55% and 45% YoY annual revenue growth. Duolingo reached an inflection point in 2023, adding more than 13 points of adjusted EBITDA margin to over 17%. This underscores the point that an incredible product can drive a profitable business.

The Conversion Daisy Chain Generates Growth

Ahn states that the more learners it can attract to its platform, the more learners it can convert over to subscribers. The more subscribers they can convert, the more money they will invest in its courses, making them more engaging and fun. Rinse and repeat.

Focusing on the Family Plan

DAU growth has accelerated for 10 straight quarters, but Ahn pointed out they can't accelerate user growth "forever." They expect DAU growth to be closer to the mid-50% range. However, 2024 is still projected to have a strong top-line performance driven by rapid user growth and conversion of free-to-pay subscriptions. The company is putting more resources behind the family plan, which has proven to have higher retention, increasing its LTV. The family plan has grown to 18% of its subscriber base.

Ahn concluded, "Last year, we reached an incredible milestone. Our learners completed their 100 billionth lesson. Perhaps even more impressive is that we have about 90% share of global online language learning MAUs. And yet we still see so much more potential and opportunity ahead of us."

Duolingo analyst ratings and price targets are at MarketBeat.