Avoiding shares of language-learning app Duolingo (DUOL 2.40%) has served me well so far, considering they've fallen over 30% year to date. Don't misunderstand; there are many things that I admire about the company. But in this article, I'll share the reasons that I've avoided Duolingo stock up to this point.

However, I could become a buyer of Duolingo stock in 2023 for a simple reason: I didn't believe the company could make the jump from a language-learning app to a broader eduction-technology company. But I'm being proved wrong right now. And this revelation is enough for me to rethink a Duolingo investment entirely.

What Duolingo is doing

As mentioned, Duolingo is an app for learning other languages. And as a former linguist, I'm thoroughly impressed with the system. However, I'm warming up to the idea of Duolingo as an investment because of a new app that the company just launched: Duolingo Math.

Duolingo Math launched in late October and is off to an impressive start. According to third-party app data company SensorTower, Duolingo Math has been downloaded 200,000 times in the past month, and currently ranks in the top 100 education apps on Apple's App Store for both iPads and iPhones. 

Ratings for Duolingo Math are also head-turning. SensorTower's data says that 82% of users give it five stars.

Duolingo's foray into math isn't a surprise. From its start as a public company in  2021, management discussed become a broader education-technology company. However, I had my doubts regarding the feasibility of those ambitions.

In its filings with the Securities and Exchange Commission (SEC) to go public, Duolingo said, "In 2020, approximately 90% of our growth came from organic sources such as word-of-mouth." Therefore, it clearly has brand recognition. However, from my point of view, Duolingo's brand recognition wouldn't extend beyond language learning and into other categories. After all, the very name implies something linguistic. 

If early download data is any indication, I was wrong about Duolingo Math and Duolingo does have a broader opportunity than just language learning. And that's hugely relevant to an investment thesis.

Why Duolingo's recent moves matter

A tiny percentage of Duolingo users account for the majority of the company's revenue. The company generates revenue in multiple ways. But 75% of revenue in the third quarter of 2022 came from subscriptions. And there were only 3.7 million paying Duolingo subscribers at the end of Q3, compared with 56.5 million monthly active users.

Duolingo's paying subscribers were up 68% year over year in Q3, which is sensational growth. However, I believe there's a ceiling on how many people will be willing to pay to learn a language during a given time period. Even if a person is interested in paying today -- let's say in preparation for a trip next year -- that willingness goes away once the need for learning a language passes.

Trading at a price-to-sales valuation of over 8, which I consider pricey, I need a high level of confidence in Duolingo's ability to grow revenue for many years in order to invest. As the chart below shows, the company's grown well to this point. But the limited scope of the business model -- language-learning subscriptions -- made me uncomfortable with a buy-and-hold investment strategy.

DUOL PS Ratio Chart

DUOL PS Ratio data by YCharts

Some might point out that Duolingo had already branched out; literacy app Duolingo ABC launched in 2020. And that's true. But Duolingo ABC is primarily targeted toward kids, so that app can be more challenging to monetize with subscriptions and ads. Moreover, literacy is still related to language. In other words, Duolingo ABC's success wasn't quite what I was looking for.

The apparent early success of Duolingo Math is what I was looking for. Management noted that it's being used by adults more than kids so far. And this led CEO Luis von Ahn to say, "In terms of monetization, I'm pretty confident we'll be able to monetize this app pretty similarly to Duolingo."

If Duolingo can successfully jump from language to math, then pretty much any education category is on the table. And if that's the case, then I feel much more comfortable projecting high growth over a long horizon, which could justify Duolingo's pricey valuation.

I've noted third-party data for Duolingo Math because that's what's available to us. In 2023, I expect better numbers to come from Duolingo's management. That's what I'll be watching for in coming quarters. And promising progress there could result in me buying Duolingo stock for the long haul.