The technology industry is off to a hot start in 2023, with the Nasdaq-100 index climbing 23% so far. Investors are growing even more optimistic about the sector because many companies have just reported better-than-expected financial results for the quarter ended March 31.
Duolingo (DUOL -2.28%) is one of them. It crushed its prior guidance for revenue and profitability, and the company gave investors more information about how it's deeply integrating artificial intelligence (AI) to cement its leadership position in the digital language education industry.
Duolingo stock has soared 100% year to date, but here's why it might go even higher.
Duolingo is taking education to the next level with AI
Duolingo is the largest digital language education platform in the world. It uses a mobile-first approach, placing an interactive, engaging, and gamified learning experience right into the pockets of its users so they can improve their language skills on the go.
Duolingo users complete one billion exercises on the platform each day, so the company has a trove of valuable data at its fingertips. Thanks to the rapid advancement in AI, it's learning more from that data than ever. The company has been working on its own AI initiatives for a decade, but it partnered with ChatGPT creator OpenAI back in 2021 to supercharge its efforts.
OpenAI's newest GPT-4 technology has been nothing short of revolutionary for Duolingo. It can craft the sentences (in multiple languages) that form each course, so Duolingo's expert team has more time to focus on other impactful improvements to the platform. Plus, GPT-4 is powering two new features called Explain My Answer and Roleplay, which are only available to users who sign up for the paid Duolingo Max subscription.
Explain My Answer uses AI to deliver personalized feedback to each user based on their mistakes, and Roleplay is a chatbot that users can lean on to improve their conversational skills in their desired language.
Additionally, Duolingo has offered users a certified English proficiency test for years, which is recognized by over 2,000 institutions, including some of America's most prestigious universities. But instead of using a human to design the test, Duolingo uses AI to create a pool of questions so large that a student would have to take the test 1,000 times before seeing repeats, making it cheat-resistant and secure. Upon completion, the English test is also graded by AI.
Duolingo crushed expectations in Q1
Duolingo was one of just a few technology companies consistently beating and raising its own guidance throughout 2022 despite challenging economic circumstances. It has carried that momentum into 2023 with a stellar first-quarter result.
The company told investors to expect $114 million in revenue for the quarter at the high end of the range. It delivered $115.7 million, a 43% jump compared to the year-ago period. Additionally, Duolingo expected to generate $11.4 million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) but actually generated $15.1 million. It's the company's primary measure of profitability, so the beat was an extremely positive development.
The strong quarterly result came on the back of a whopping 63% year-over-year increase in the number of paying Duolingo subscribers, which reached an all-time high of 4.8 million. It outpaced the growth of Duolingo's monthly active users (MAU), which came in at 72.6 million, up 47%. That means the number of paying users is increasing as a percentage of MAU, emphasizing how highly they value the learning experience.
Plus, with the new, more expensive AI-powered Max subscription, investors should look for continued strength in paying customers.
Why Duolingo stock is a buy right now
Here's the cherry on top for investors: The above results prompted Duolingo to increase its full-year revenue guidance for 2023. It now estimates it will bring in $509 million (at the high end of the range) compared to $498 million when it last issued guidance. It also upped its profitability forecast.
Despite its incredible progress so far, Duolingo has barely scratched the surface of its opportunity. It believes over two billion people are learning a language worldwide and that as technology continues breaking down borders, demand for education in global languages like English will likely only grow over time.
Many artificial intelligence software applications are looking for a use case -- in other words, developers have built this incredible technology but haven't entirely figured out how to monetize it. Duolingo is actually putting AI to work at the coalface of its business, and it's already making a financial contribution. This company is a great bet for investors who want AI exposure in their portfolios.
Duolingo stock has soared 100% in 2023 -- and it's only May. But it remains 28% below its all-time high amid the broader sell-off in the tech sector. Therefore, investors still have time to buy in at a discount, and given the company's track record in performance, there could be significant upside ahead.
