Earnings season for the latest quarter is drawing to a close, but apparently, there are still a few surprises left. Digital language learning platform Duolingo (DUOL -0.55%) reported its results on Feb. 28, and not only did it blow away expectations financially, but investors were also delighted to learn about some of its upcoming new features. Why? Because they're powered by advanced artificial intelligence (AI).
OpenAI's ChatGPT conversational language model has taken the tech world by storm, and it has even attracted a multibillion-dollar investment from Microsoft. Now, Duolingo says it is working closely with that very company to change the way users learn languages.
This revolutionary next step suggests another reason for investors to consider buying Duolingo stock now. Here's why.
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Duolingo bets on artificial intelligence
Duolingo is the most popular language education app in the world. It has been downloaded more than half a billion times, and in the fourth quarter of 2022, it had 60.7 million monthly active users, which was 43% more than it had a year ago.
The platform owes its success to a couple of things. First, its freemium business model allows the majority of users to learn for free while roughly 7.8% of the base pay a subscription to unlock additional features (and that number is growing quickly). Second, its mobile-first, gamified approach takes learning out of the classroom and into the user's pocket, delivering an accessible, fun, and engaging experience. But that experience is about to get even better.
Duolingo has invested in artificial intelligence since 2013, but the company believes it's now at a stage where it can boost the learning experience on a more personal level -- almost like a tutor could. Duolingo has been working with OpenAI to develop features for a new paid subscription tier called Max. Those features are "Explain My Answer," which will offer personalized feedback to users based on their mistakes in a given lesson, and "Roleplay," which allows users to chat with Duolingo characters to practice their conversational skills.
The goal is to simulate a human tutor, which could accelerate a subscriber's progress significantly compared to using the free version of the Duolingo app. And not to state the obvious, but that could be incredibly valuable financially speaking for both the user and Duolingo.
Duolingo crushed its 2022 revenue guidance
Duolingo was one of a mere handful of companies to regularly increase its revenue guidance throughout 2022, even in the face of extremely difficult economic conditions. As it turns out, users valued language learning and prioritized maintaining their subscriptions.
The company initially told investors it expected to generate $342 million in revenue for the year, and that figure had been revised to $367 million by the third quarter. But when its final results came in, Duolingo had brought in $369.5 million for 2022, representing 47% growth compared to 2021.
Since its inception, the company has invested heavily in improving and expanding its platform, which it says is essential for user growth. As a result, the company has sacrificed profitability to continue developing, but it made substantial progress toward reducing its losses in 2022.
Its net loss came in at $59 million for the year, and while that was only a marginal improvement compared to its $60 million net loss in 2021, it represented 16% of revenue compared to 24%, so it's moving in the right direction.
Why Duolingo stock is a buy now
Duolingo has a remarkable platform. Not only is it the biggest digital language education app on the planet, but management says 90% of its users are acquired organically with no paid advertising.
It has also become the highest-grossing mobile app in the education category in both the Apple App Store and Alphabet's Play Store. That's even more impressive when you consider Duolingo only began monetizing through subscriptions in 2018.
Considering more than 2 billion people are learning languages worldwide, Duolingo has a huge addressable market to penetrate, and it continues to do so from a leadership position. By ramping up the use of artificial intelligence, the platform will be able to serve those learners more effectively than ever before while also opening the door to more opportunities to monetize.
Despite a 10% bounce on the back of its 2022 financial report, Duolingo stock is still trading down 51% from its all-time high. That might be a great entry point for investors, given the company's long-term potential.
