The technology-centric Nasdaq 100 index is down 14% year to date, which is quite a feat given it's only February. The index is inching closer to bear-market territory, which is typically defined as a loss of 20% or more.
But many individual stocks are already there. Duolingo (DUOL 0.06%) and Sea Limited (SE 1.28%) have fallen 56% and 66% from their all-time highs, respectively. Both companies have business models built for the future, so investors should view this as a buying opportunity that can generate significant returns over the long term.
1. Duolingo: Down 56%
Duolingo estimates 1.8 billion people are learning a foreign language around the world right now, using a variety of different methods. But the market for digital methods is expected to grow an average of 25% per year until 2025, far outpacing overall industry growth of just 11%. That means Duolingo is perfectly positioned to ride this tailwind thanks to its online approach.
Duolingo has been downloaded over 500 million times, and it's the highest-grossing app in the education category across both Apple's App Store and Alphabet's Google Play store. Its rise to the top of those lists was swift, considering it only added paid subscriptions in 2018.
While the company also makes money from advertising, in-app purchases, and one-off assessments, subscriptions account for 73% of its total revenue. The percentage of monthly active users upgrading to a premium service on Duolingo has steadily climbed from 1% in 2018 to 5.5% as of the third quarter of 2021.
This has resulted in soaring revenue growth, from $70.8 million in 2019 to an estimated $245.5 million for full-year 2021 -- good for a compound annual growth rate of 86%.
Duolingo values its market opportunity at $47 billion annually by 2025, but that could expand given the rapid growth in emerging economies. For instance, the company experienced 400% growth in India during the early months of the pandemic as more of that country gained access to the internet.
The company isn't profitable yet, but it has a high gross margin of 72% as of the third quarter. So as it continues to expand its top line and build scale, Duolingo has the opportunity to pare back its expenses to deliver positive earnings for investors. Duolingo's increasing paid subscriber count will help this trend along as the current trajectory suggests the current level of 5.5% of active users certainly isn't the peak.
2. Sea Limited: Down 66%
Singapore-based Sea Limited is a triple threat in the digital economy, making it a diverse investment option for any portfolio. The company's three segments cover gaming, e-commerce, and payments. Analysts estimate those segments combined to generate $9.5 billion in full-year 2021 revenue.
Sea Limited's Shopee app is an e-commerce marketplace with a hybrid role, facilitating both consumer-to-consumer and business-to-consumer sales. It's focused on the Asian market, and it's also the foundation of the company's e-commerce segment, which generates the majority of Sea Limited's total revenue. The company told investors to expect $5.1 billion in e-commerce revenue for 2021, up a whopping 135% year over year.
But Sea Limited's digital entertainment business is arguably its most exciting. It hosts the gaming segment, which is responsible for the Free Fire battle royale mobile game, a juggernaut in the industry with over one billion downloads. The game continues to expand with both new iterations and new features designed to retain its audience. Overall, the company's digital entertainment piece engaged 729 million quarterly active users in the third quarter with 93.2 million of them being paying users.
Looking ahead to 2022, analysts expect Sea Limited to continue its incredible run of meteoric top-line growth. Revenue was $1.05 billion in 2018 and is estimated to be $13.98 billion for 2022 -- that represents a compound annual growth rate of 91%.
But Sea Limited could outperform projections for 2022 and beyond. Asia is the largest single market for mobile gaming, expected to make up over 50% of total revenue this year, and that gives this company a major geographical advantage. Mobile gaming continues to grow as a share of the overall gaming industry, and it now makes up the majority of gaming revenue at 52%.
Digital trends are only moving in one direction, one in Sea Limited's favor. For investors who want exposure to the hottest segments of the new economy at a major discount, this stock might be the way to go during the tech sell-off.