We came across a bullish thesis on Duolingo, Inc. (DUOL) on Substack by Lorenzo Bastianelli. In this article, we will summarize the bulls’ thesis on DOUL. Duolingo, Inc. (DUOL)’s share was trading at $318.67 as of Jan 10th. DOUL’s trailing and forward P/E were 174.14 and 103.09 respectively according to Yahoo Finance.
romantitov/Shutterstock.com
Duolingo’s success in the language-learning market is rooted in its innovative freemium model, which allows users to access its core service for free while offering premium features through subscriptions. This approach has enabled Duolingo to achieve rapid user growth and capture a significant portion of the global language-learning market, growing over 30% year-over-year. By offering free content, Duolingo has democratized language education, attracting a broad audience that traditional competitors like Rosetta Stone and Babbel cannot reach without compromising their high-cost models. These incumbents may offer free trials or limited free features, but they cannot match Duolingo’s comprehensive and engaging free experience. This model creates a significant competitive barrier, as rivals are forced into a dilemma: compete by offering a comparable free tier, potentially cannibalizing their premium revenue, or concede the free-tier market to Duolingo, risking market share.
Duolingo’s strategy is further bolstered by the strength of its brand, which has become a cultural phenomenon. CEO Luis von Ahn credits much of Duolingo’s marketing efficiency to the word-of-mouth referrals from satisfied users, who spread the word to friends and family. The company’s presence on platforms like TikTok, where its hashtag has amassed billions of views, and its frequent appearances in internet memes and late-night comedy sketches, have turned Duolingo into a recognizable brand. This widespread recognition enhances its ability to grow organically, reducing the need for extensive paid marketing. As a result, Duolingo has seen a decline in its revenue spent on Selling, General, and Administrative (SGA) expenses, reflecting its ability to rely on its brand and user advocacy rather than costly marketing campaigns.
Central to Duolingo’s sustained growth is its flywheel, which operates through two main mechanisms: the learning flywheel and the investment flywheel. The learning flywheel begins with the platform’s massive user base, generating vast amounts of data that power its AI and machine learning models to personalize lessons. This personalization drives user engagement, which attracts more learners and further enhances the platform’s data. The investment flywheel supports this growth by channeling revenues from paid subscriptions into product innovation, improving AI capabilities, and refining the overall user experience. This cycle of data-driven improvement and reinvestment fuels Duolingo’s competitive edge, reinforcing its market leadership.
The network effects of Duolingo’s platform are evident in the increasing conversion of freemium users to paid subscribers, further expanding its user base and monetization opportunities. As more people use the app, Duolingo’s ability to enhance its offerings through data and technology becomes increasingly difficult for competitors to replicate, solidifying its position as the leader in the language-learning space. This network effect, combined with its efficient use of resources, has resulted in impressive subscriber growth and retention metrics, with Duolingo continuing to refine its approach to keep users engaged.
Despite challenges with user retention, Duolingo has employed several strategies to improve subscriber renewal rates. The introduction of gamification features, such as streaks, leaderboards, and friend challenges, encourages daily engagement, while the launch of Duolingo Max, powered by generative AI, provides users with personalized learning experiences that further enhance retention. These features create a sense of community and accountability, motivating users to return daily and engage with the app, leading to sustainable growth. The improvement in Duolingo’s DAU/MAU ratio is a clear indicator of the success of these retention efforts, further supporting the company’s long-term growth prospects.
Duolingo’s ability to leverage process power, or the capacity to efficiently analyze and utilize large volumes of data, is another key factor in its success. The company has built the world’s largest language-learning dataset, enabling it to run hundreds of experiments each quarter to optimize the user experience and platform features. This continuous cycle of experimentation and data-driven optimization has not only improved user engagement but also increased Duolingo’s operating margin, which turned positive in 2024. With significant investments in research and development, Duolingo is well-positioned for exponential growth in the years to come, underpinned by its innovative business model, strong brand, and commitment to improving the user experience.
Duolingo, Inc. (DUOL) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 31 hedge fund portfolios held DOUL at the end of the third quarter which was 35 in the previous quarter. While we acknowledge the risk and potential of DOUL 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 DOUL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article was originally published at Insider Monkey.