What happened
Shares of language-learning app Duolingo (DUOL 4.98%) skyrocketed 57.1% in March, according to data provided by S&P Global Market Intelligence. The company reported financial results that were good. But guidance blew Wall Street's expectations out of the water, which I believe is the primary reason that Duolingo stock absolutely crushed the 3.5% return for the S&P 500 during the month.
So what
After the market closed on Feb. 28, Duolingo reported financial results for 2022, and I think one statement near the top of the press release sums it up. Management wrote, "For the sixth quarter in a row, we saw accelerating user growth on Duolingo." The company now has 60.7 million monthly active users. And despite that size, growth is ramping up, not hitting a ceiling.
NASDAQ: DUOL
Key Data Points
Accelerating user growth from Duolingo is surprising a lot of investors, myself included. Moreover, the company is winning when it comes to selling users on higher-end subscription products.
Duolingo is building a broad mobile-based education company, but it primarily generates revenue from its language-learning app, which is free with ads. It also has a paid subscription tier called Super Duolingo, from which it generates most of its revenue. The good news is that it now has 4.2 million of these paying subscribers, which was a whopping 67% year-over-year increase.
Accelerating user growth and impressive adoption of its subscription tier were enough to excite Duolingo investors in March. But on March 14, the company gave the market another reason to be optimistic when it jumped on the artificial-intelligence (AI) bandwagon. It introduced a new, higher-subscription tier called Duolingo Max, offering new features built on OpenAI's chatbot technology.
The majority of the gains for Duolingo stock came early in March because of its strong earnings report. However, the stock kept gaining after announcing its AI enhancements.
Now what
For 2023, Duolingo expects to generate revenue of $486 million to $498 million, a potential year-over-year increase of 32% to 35%. Wall Street didn't expect anything close to this. The consensus revenue estimate was just $464.5 million, according to The Fly. And this strong revenue guidance was another big reason the stock was up in March, if not the primary reason.
The other thing to keep an eye on here is Duolingo's progress on adjusted profitability -- the company gives guidance for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
In 2021, Duolingo had negative adjusted EBITDA but swung to a positive 4.2% adjusted EBITDA margin in 2022. In 2023, management is guiding for an adjusted EBITDA margin of 10% to 12%, which is a massive improvement on an apples-to-apples basis.
Therefore, Duolingo is growing fast and sustaining growth longer than some thought possible. Moreover, it's gaining some operating leverage with scale. And these two things are propelling the stock to the higher end of my watch list right now.
