Few stocks have outperformed Duolingo (DUOL 3.64%) this year. Shares of the language-learning software company are up 79% since Jan. 1. Needless to say, it's been all systems go for Duolingo in 2023.
Let's examine why shares have caught fire and whether they will keep climbing.
Image source: Getty Images.
Duolingo's key metrics are skyrocketing
Duolingo operates a language-learning app with over 60 million monthly active users (MAUs). Whether for work, love, or fun, people use Duolingo's free or paid app to help master languages from around the world. The company estimates that over 2 billion people are now studying a new language, leaving Duolingo plenty of room for growth.
In its most recent quarter (the three months ending Dec. 31, 2022), the company's key user metrics soared. Daily active users (DAUs) surged 62% year over year; MAUs were up 43%. Paid subscribers swelled by 67%.
Image source: Duolingo.
Similarly, bookings (a critical forward-looking metric that includes subscription and other fees that have yet to be fully captured as revenue) continue to climb. As you can see, Duolingo's total bookings in 2022 increased 46% from the prior year.
Mushrooming cash flow and narrowing losses are bullish signs
If Duolingo has an Achilles' heel, it's a familiar one for growth stocks: The company is not profitable.
In 2022, Duolingo lost $59.6 million, almost identical to the $60.1 million it lost in 2021. And that's after revenue grew by 42% over the same period to $369.5 million.
DUOL Gross Profit Margin (Annual) data by YCharts
There are, however, signs that profitability is on the horizon. Duolingo's gross profit margin has jumped from 71.5% to 73.1% over the last two years. Meanwhile, the company's free cash flow hit a record high of $43.5 million last quarter.
Indeed, Wall Street analysts are taking note and raising their earnings-per-share estimates for the company. The consensus estimate for 2023 now stands at $(0.85)/share. That's a significant improvement over last year's $(1.51)/share. If Duolingo can continue to grow its margins, analyst estimates should rise further -- along with Duolingo's stock price.
Is Duolingo a buy now?
Duolingo seems to be in a sweet spot at the moment. The company has executed by growing its subscriber base and improving its gross margins. Going forward, it will need to expand its international appeal, which is a natural fit given its business model.
I continue to think Duolingo is a great fit for growth investors looking to add a mid-cap name to their portfolios.
