Key insights
- This analysis suggests Duolingo is undervalued due to AI-related fears, highlighting its strong financials (large cash reserve, no debt, low P/E), diversified revenue streams (primarily subscriptions), and user growth. A $400M share buyback and potential benefits from social media restrictions further support a bullish outlook. This could positively influence investor sentiment towards growth stocks with subscription-based models.
The company of an app that I use myself – Duolingo. It is after very heavy drops. It lost value on a wave of AI-related fear, similar to Chegg.
MAIN INVESTMENT THESIS: In my opinion, there is a large misunderstanding here. Duolingo is not an app that will be replaced by AI. It is more of a social medium with 50 million users who pay.
First, I will list the accelerators, and in the further part of the text, a more detailed analysis:
+ The company's capitalization is $5 billion, and the company has $1 billion on its account alone, with no financial debt.
+ The company has a P/E of about 10, double-digit revenue and profit growth, high margins, and strong cash flow.
+ The company systematically increases the number of users and develops new business legs. It is not dependent, like other social platforms, on advertising revenue.
+ The company is after a gigantic drop and looks like it is bouncing; in my opinion, people panicked unnecessarily.
+ Share buyback for $400 million (about 8% of shares in circulation at the current price). Funds are already reserved from that $1 billion on the account.
+ Countries are introducing restrictions for social platforms for children, e.g., Australia. These bans do not apply to Duolingo as an educational platform. Which means that competition is decreasing.
The proof for the above thesis is that Chegg instantly lost revenue and customers. Duolingo, quite the opposite – systematically expands its user base and monetizes very well. It wants to have 100 million daily active users by 2028.
Unlike Facebook, YouTube, Instagram, or Twitter, it does not base its main income on advertisements.
Revenue split:
Ads: 7.7%
Subscriptions: 84.0%
In-app purchases: 4.3%
Duolingo English Test: 4.3%
It is worth paying attention to the last item, which has a future.
Duolingo English Test (DET)
DET is the fastest and most innovative language exam in the world, which outclasses traditional competition in terms of convenience. For a fraction of the price of classic certificates, i.e., only about 60 dollars, you can take it at any time, 100% online. Instead of exhausting marathons, a powerful adaptive engine powered by artificial intelligence precisely verifies your proficiency in just one hour. The official, rigorously supervised result lands in your account in only 48 hours, after which you can send it for free to universities without any limits. Although British Cambridge and Oxford still rely on the old system, global acceptance of DET is growing like an avalanche. Currently, this lightning-fast certificate successfully opens doors to over 5,000 prestigious institutions, including the academic elite like MIT, Yale, or Stanford.
Balance Sheet
Duolingo possessing a billion dollars in cash with a total absence of long-term debt is a phenomenon in the sector of growing technology companies. Such a balance sheet is not only a "safety cushion" but a powerful strategic weapon. In an environment of uncertain interest rates, the company does not have to worry about rising debt service costs. What's more, this mountain of cash works for the financial result itself thanks to interest. This gives the management absolute freedom of action: they can easily finance their own innovations (e.g., powering Duolingo Max with expensive AI models), acquire smaller entities from the education industry during a market sell-off, and in the future – if the shares are still cheap – launch a share buyback program, which would constitute a direct catalyst for the exchange rate growth.
Low Customer Acquisition Cost (CAC)
Another argument speaking for the fact that Duolingo is closer to a social media phenomenon is their marketing. Most firms from the EdTech or SaaS industry must burn hundreds of millions of dollars on ads on Google or Facebook to gain new users. Duolingo largely bypasses this problem. The owl "Duo" has become a pop-culture icon and a star with tens of millions of fans on TikTok. Thanks to a powerful viral mechanism, memes, and natural referrals, the vast majority of traffic in the app is organic (free) traffic. Such a model allows the company to maintain uncommonly high margins, because the capital that the competition must spend on survival and marketing, Duolingo turns into pure net profit and reinvests in making users even more addicted to its platform.