We came across a bullish thesis on Duolingo, Inc. (DUOL) on Substack by Antonio Linares. In this article, we will summarize the bulls’ thesis on DUOL. Duolingo, Inc. (DUOL)’s share was trading at $347.64 as of Nov 27th. DUOL’s trailing and forward P/E were 189.97 and 112.36 respectively according to Yahoo Finance.
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Duolingo, often perceived as just a language-learning app, is quietly building an infrastructure that can revolutionize global education. At its core, Duolingo’s organizational algorithm focuses on enhancing student motivation, which leads to better engagement and improved learning outcomes, driving financial growth. This approach allows Duolingo to deliver superior educational experiences at a fraction of the cost of traditional methods, even in the face of abundant free content online. The company’s ability to motivate students, despite the availability of free resources, has translated into impressive financial results, with free cash flow per share increasing significantly since 2021.
The company’s growth trajectory is driven by a unique form of “process power,” which refers to the organizational strength behind consistent, small improvements that compound over time. In Q3 2024, Duolingo’s daily active users (DAUs) grew by 50% year-over-year, continuing the momentum from the previous year. CEO Luis von Ahn attributes this success to constant improvements in features, such as the introduction of “Friends Streak,” which enhances user retention. These incremental improvements indicate Duolingo’s culture of rapid iteration, which consistently optimizes the user experience and keeps users engaged.
Duolingo’s success, however, wasn’t guaranteed. When first analyzing the company, there was concern about the heavy reliance on English-speaking countries for revenue. This posed a potential risk during economic downturns, as learning English in non-English speaking countries directly correlates to higher salaries, while English-learning in English-speaking countries is more recreational. By Q3 2024, Duolingo had already made substantial progress in addressing this issue, with over 2 million DAUs now using the platform to learn intermediate English. This development is a testament to Duolingo’s ability to adapt and solve problems efficiently, a hallmark of its process power.
Duolingo’s growth also benefits from its ability to decrease the cost of change. As the company continues to expand its experiments, it increases testing frequency, enabling faster adaptation and improvement. The success rate of these tests hovers around 50%, yet the sheer volume of experiments conducted allows the company to refine its user experience continually. This ability to rapidly test and implement changes is crucial in sustaining Duolingo’s competitive edge and growth.
Looking ahead, Duolingo is positioned to leverage generative AI to enhance its content creation further. In Q3 2024, Duolingo launched Lily, an AI agent designed to help users practice any language, which will be available to premium subscribers. This feature, which promises to accelerate the learning curve for intermediate and advanced learners, could significantly boost Duolingo’s earning power with minimal additional cost. With the decreasing cost of training large language models (LLMs), Duolingo’s proprietary data, accumulated from years of user interactions, positions it to create an AI-driven educational system that could disrupt traditional education.
While Duolingo’s valuation of $15.48 billion, with a high price-to-sales ratio of 24.4, may seem steep, it is likely to appear reasonable in hindsight. Duolingo’s infrastructure is far more powerful than it initially appears, and its impact on the education market is only beginning to unfold. As Duolingo continues to refine its process power and harness AI technology, it stands poised to capture a significant share of the $7.3 trillion global education market, leaving traditional educational institutions struggling to compete.
Duolingo, Inc. (DUOL) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 31 hedge fund portfolios held DUOL at the end of the third quarter which was 35 in the previous quarter. While we acknowledge the risk and potential of DUOL as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DUOL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.