Duolingo has taken the first steps in its planned initial public offering (IPO), filing an early stage prospectus on its issue late last month. The company operates the popular language-learning app of the same name, and as such will be one of the very few publicly traded language learning apps on the market (Pimsleur Language Programs -- a division of a division of ViacomCBS (PARA 3.27%) -- can be owned by investors, but as part of a big media company it's far from a pure-play in the segment).
With that in mind, here are three things potential investors in this language-learning-focused tech company should be aware of about its upcoming IPO.
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1. Certain investors could get a jump on the IPO
Much has yet to be determined for the Duolingo IPO. The company hasn't yet set the price of its stock nor the number of shares it is issuing. It also hasn't fixed an IPO date.
That's not stopping it from releasing some shares to the public, albeit in a limited way. Duolingo revealed in its prospectus that it will release some of the shares to the online trading platform Robinhood, for sale through the brokerage's recently launched IPO Access service, under which its users can request to buy shares of upcoming IPOs. According to Duolingo, these sales will close "at the same initial public offering price, and at the same time, as any other purchases in this offering."
Robinhood won't be an underwriter of the IPO (more on those entities in a moment). Rather, it's simply acting as an early-stage broker of Duolingo shares. As with other elements of the language learning company's IPO, though, no details have yet been provided.
2. It's basically an early-stage tech growth stock
Most consumers are familiar with Duolingo through its mobile app, which is readily available for free download through Apple's App Store and Alphabet's Google Play. It hews to the good old freemium model, with a stepped-up pay offering called Duolingo Plus. This confers a set of premium user features and ranges in cost from $6.67 to $12.99 per month (depending on platform and subscription length).
Like a great many young tech companies that have listed on the stock market, Duolingo has been posting robust growth numbers but consistent bottom-line losses in its recent past. In 2020, revenue more than doubled from the previous year, landing at nearly $162 million. Growth wasn't as robust in the first three months of this year but still shot 97% higher (to nearly $55.4 million).
Duolingo uses two metrics favored by social media and other online operators to gauge its app's popularity -- daily and monthly average users (MAUs). The MAU count rose by 34% in 2020 (to 36.7 million) and by 19% year over year in the first quarter (to 39.9 million).
As for profitability -- or the lack thereof -- the 2020 net loss was $15.7 million, not appreciably deeper than the 2019 shortfall of $13.6 million. In Q1 of this year, due in no small part to a dramatic ramp-up in sales and marketing costs, the company's shortfall deepened considerably to almost $13.5 million from the year-ago $2.2 million deficit.
3. It'll be a rare company from its segment on the market
If it were a pure-play tech or, more specifically, social media site operator, Duolingo's slowing top-line numbers and MAU counts might leave investors somewhat cold.
But there's no real significant pure-play stock in the language instruction category; again, Pimsleur is under the control of ViacomCBS -- which, needless to say, has far larger assets than the language instruction unit. Rosetta Stone was a publicly traded company for over a decade, but shortly after a nearly 40% pop on the stock's first day of trading in 2009, its price sank and never meaningfully recovered. The company ultimately went private in a 2020 transaction.
So I think Duolingo will see some investor interest at the beginning, due to that uniqueness and the still-rising trajectory of its revenue and user base. That free publicity from the popular Robinhood -- an ambitious brokerage just getting started in the IPO realm -- won't hurt either. Shareholders will not be tolerant of losses for too long, though, so the company would do well to start flipping those bottom-line numbers into the black as soon as it can.
The details so far
To repeat, no IPO price, amount of shares, or issue date has yet been set for Duolingo. The company has applied for a Nasdaq listing under the ticker symbol DUOL. The underwriting syndicate of the issue includes Goldman Sachs, Bank of America Securities, and Barclays.
