2022 has been a bumpy year for the stock market, and there isn't an end in sight just yet. The technology-focused Nasdaq-100 index is trading deep in bear market territory with a loss of over 30% year to date, and many individual tech stocks have fared much worse, some down as much as 70% in 2022.
But there are some companies having a slightly better year than the broad market, because their businesses are less exposed to the effects of higher interest rates and slower economic growth. Duolingo (DUOL -0.14%) is one of them, down a less unnerving 24%. It's a global leader in digital language education, and its growth phase might be just getting started.
Here's why it's a solid bet amid turbulent market conditions.
Duolingo is executing flawlessly
Duolingo shareholders are around 7% better off in 2022 than if they held the Nasdaq-100 index, and it's thanks to the company's stellar operating performance. In the face of economic uncertainty and a tumbling stock market, Duolingo delivered one of its best periods ever in the recent first quarter of 2022.
Duolingo runs a mobile-first strategy for its language education platform, which more closely resembles a game than a learning experience. But that's why it's so successful -- it's an engaging app, and the company has even found ways to integrate social networking features to help users track the progress of their friends.
In the first quarter, monthly active users hit an all-time high of 49.2 million, and the number of users converting to a paid subscription soared 60% year over year to 2.9 million. It helped the app maintain its crown as the highest-grossing platform in the education category on Alphabet's Play Store, and the second spot on Apple's App Store.
The company's revenue jumped 47% in the quarter to $81.2 million, and bookings grew an even faster 55% to $102.1 million. That marked a quarterly all-time high on both counts, and since bookings are expected to eventually convert to revenue, it's indicative that even faster growth might be on the horizon in the future.
Maturing as a business
Duolingo only began to monetize its app with paid subscriptions in 2018, so it has scaled up its revenue incredibly quickly. Naturally, as the numbers have trended higher in each year since then, the rate of growth has slowed to a more sustainable level.
One key challenge Duolingo faces is profitability. It's still a loss-making company, because it's still early in its monetization phase, but with a gross profit margin of over 73%, it has plenty of flexibility to invest in growth before delivering positive earnings. Once the business achieves scale, it can trim back operating costs like sales and marketing so more money flows to the bottom line.
Until then, Duolingo is finding success by spending money to expand the number of languages it offers to include those with non-Roman writing systems like Japanese and Hebrew. In addition, it's investing in advanced technology like artificial intelligence to help users correct mistakes more quickly, improving the learning experience.
Weathering the storm
Duolingo estimates 1.8 billion people are learning a foreign language worldwide. It's often something many people want to do, but they fail to make the necessary commitment. Duolingo's app bridges that gap by offering a convenient and fun way to learn, which is highlighted by the remarkable fact 90% of its user acquisition is organic -- only the minority of growth comes through paid marketing.
That's a major advantage in tough economic conditions where companies would typically have to pay more to attract customers who are less sticky, and less willing to spend money. It's one reason Duolingo could continue to outperform its technology peers.
Another reason is the company's focus on emerging markets like India. This story is still in its infancy, but Duolingo saw 400% growth in that country in 2020, and it estimates that by the end of this year, 500 million Indians will have accessed the internet for the first time ever as mobile data costs continue to fall.
It's an enormous long-term opportunity as Duolingo offers arguably the most accessible way for citizens of economically developing nations to learn global languages like English.
If history can teach investors one thing, it's that bear markets don't last forever. In fact, they're often the best time to put money to work. For that reason, this might be a great chance to build a position in Duolingo stock ahead of the next bull market.
