Up 119% year to date, Duolingo (DUOL -0.71%) is one of this year's best-performing stocks. Yet, many investors remain unfamiliar with the company and its business. So, let's dig in and see why Duolingo has been one of the year's big winners and whether it's too late to buy.
Language learning for everyone
For those unfamiliar with Duolingo, the company's goal is to "make language learning fun, free, and effective for anyone who wants to learn, wherever they are." And with over 7,000 languages spoken by roughly 8 billion people on the planet, Duolingo has a huge addressable market.
At any rate, the company already offers courses in 43 different languages through its website and mobile app. Popular courses include Spanish, French, and English, but you can also find such offerings as Latin, Welsh, and Swahili.
What's more, the company is also an under-the-radar artificial intelligence (AI) play. Duolingo uses AI to help generate content and tailor course material. It also relies on AI to oversee and score its English language test -- popular with foreign-language students aiming to study in American or British universities.
Its popular app is seeing surging results
For Duolingo, it's all about growth. The company, which debuted via an initial public offering in July 2021, remains quite early in its life cycle. Therefore, attracting and retaining users is of paramount importance.
And on that front, it's clear: The company's product is a smash hit. In its most recent quarter (ended on March 31), Duolingo reported outstanding user figures. Daily average users jumped 62% year over year to 20 million, and monthly average users soared 47% to 73 million.
Image source: Duolingo Q1 2023 earnings presentation.
Meanwhile, revenue rose to $116 million -- an increase of 42% year over year. Bookings (contracted sales not yet recorded as revenue) grew 37% to $140 million.
However, Duolingo remains unprofitable. In fact, in its most recent quarter, its net loss totaled $2.6 million. That's an improvement from a year ago, when the company's net loss was $12.2 million, but a loss is still a loss. Moreover, stock-based compensation remains a drag for the company. In its most recent quarter, Duolingo paid $21.1 million in stock-based awards.
Nevertheless, Duolingo has positive free cash flow, which increased to $54 million in its most recent quarter. That's key, because it allows management to fund operations without dipping into cash reserves or taking on costly debt.
DUOL Free Cash Flow data by YCharts
Is Duolingo a buy now?
Let me be clear: Duolingo stock is not for everyone. The company has a market capitalization of less than $7 billion -- putting it squarely in the mid-cap category. Moreover, just as Duolingo's app has skyrocketed in popularity this year, a slowdown in user growth could send shares tumbling.
Nevertheless, for investors looking to add a smaller, up-and-coming tech stock that sits at the intersection of communication and education, Duolingo is a name to consider.
