What happened

Shares of Duolingo (DUOL 0.66%) popped 10.2% in March, according to data provided by S&P Global Market Intelligence. The stock was down sharply early in the month following the release of financial results for 2021. However, the analyst community began highlighting this investment opportunity later in the month, which led to market-beating gains.

So what

Duolingo primarily generates revenue from operating a language-learning app. On March 3, the company reported financial results for 2021. For the full year, the company generated revenue of $294 million, which was up 55% from 2020 and more than what analysts thought it would generate. Moreover, while it did have a $60 million net loss, this was also better than expectations.

A learner interacts with the Duolingo app on a phone.

Image source: Duolingo.

Duolingo beat expectations but its stock fell nevertheless. To be fair, many technology stocks like Duolingo were falling for much of early March. However, market conditions improved later in the month, much to the benefit of Duolingo and its peers.

DUOL Chart

DUOL data by YCharts

However, don't attribute all of Duolingo's gains to favorable market conditions. Evercore added Duolingo stock to its list of best ideas (among small-cap and mid-cap companies) on March 15, according to The Fly. A move like this can inspire confidence among investors to buy the stock, which appears to be what happened.

Now what

Most Duolingo users are monetized through advertising -- they don't pay for a subscription. And overall, the company did a good job at growing its user base in 2021. Monthly active users (MAUs) reached 40.5 million, a 10% year-over-year increase. And there are now 9.6 daily active users (DAUs), an 18% jump. However, this is a sharp deceleration from 2020 when MAUs and DAUs increased 34% and 58% respectively.

While this decelerating user growth at first appears troublesome, Duolingo is doing a superb job growing its paying user base. The company now has 2.5 million paying subscribers, which is a 56% increase from 2020. Management explained it meticulously ran A/B marketing tests to achieve superior conversion results. In short, the strategy appears to be working.

For the year, 72% of Duolingo's revenue was subscription revenue. Therefore it's certainly encouraging to see this paying user base continue to grow. And it's a big reason the company is expecting at least 32% year-over-year revenue growth in 2022.

Moreover, the A/B tests led to a tangible benefit for Duolingo, encouraging for the company as a whole. Here's why: When it filed paperwork for its initial public offering (IPO), management noted how these kinds of tests are core to everything the company does. Whether it's marketing, keeping users engaged, or driving learning results, it's attempting to make data-driven decisions.

Duolingo was objectively successful in converting non-paying users into paying users in 2021 using its data-driven approach. This is good reason to hope it can continue to be successful in other areas of its business as it attempts to grow its platform into a larger family of learning apps.