Last year, Duolingo's (DUOL 3.64%) stock price seemed detached from the company's terrific performance. The number of daily active users on its language learning app surged 62%, but the stock lost nearly one-third of its value.
This year, it seems the stock market has finally begun to realize that Duolingo's language learning application can do more than just sign up a lot of free users. The stock is up 119% this year.
Is it too late to buy Duolingo now that it's more than doubled this year? Here's what you should know.
Duolingo's service is selling itself
The trouble with education apps is that there's a limited number of people willing to begin a paid course. Wealthier folks who want to brush up on a foreign language before a vacation can sometimes be convinced to start a course, but few finish them and even fewer continue after they return home.
New language education applications sometimes succeed out of the gate. Unfortunately, it's just a matter of time before all the low-hanging fruit is picked clean, and marketing expenses outpace sales.
Duolingo isn't conforming to the typical education application business cycle. In fact, revenue growth is still accelerating while sales and marketing expenses, as a percentage of revenue, are on the decline.
DUOL Sales and Marketing Expense (TTM) data by YCharts
Over the past two years, trailing-12-month revenue nearly doubled. Sales and marketing expenses grew just 36.6% over the same timeframe, and this isn't the only sign that Duolingo isn't going to become a chronic loser.
Despite modest increases to its marketing budget, the number of monthly active users on Duolingo soared 47% year over year in the first quarter. Moreover, its constantly updated applications keep converting monthly users into daily users and daily users into paid subscribers.
| Metric | Q1 2022 | Q1 2023 | Change |
|---|---|---|---|
| Monthly active users | 49.2 million | 72.6 million | 47% |
| Daily active users | 12.5 million | 20.3 million | 62% |
| Paid subscribers | 2.9 million | 4.8 million | 63% |
Data source: Duolingo.
First-quarter adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose to $15.1 million, or 13.1% of revenue. That was a huge improvement over the 4.9% adjusted EBITDA margin the company reported last year and a big step toward its long-term target of a 30% to 35% adjusted EBITDA margin.
Thinking long-term
Wealthy English speakers brushing up on foreign languages before they travel is just a small source of potential sales for Duolingo. Its biggest opportunity is among non-native English speakers who want to work beyond their own borders.
Regardless of where you're from on this planet, it's nearly impossible to do business across international borders without some level of English language proficiency. English-speaking universities still draw heaps of international students who must pass proficiency tests. English proficiency is also required to build a scientific career in nearly any discipline.
Our increasingly connected world generated $11.35 billion in English language learning expenses in 2021. This figure is expected to climb by 13.6% annually through 2030 to reach $35.78 billion, according to research from The Brainy Insights.
Every day, Duolingo receives data from more than one billion exercises completed on its application. That gives it a lot of opportunities to learn which new lessons drive subscription growth. Continuous improvements could allow Duolingo to remain the top language learning application for many years to come.
A good stock to buy now?
Duolingo has been reporting adjusted earnings, but it's still losing money according to generally accepted accounting principles (GAAP). Investors will be glad to know its net loss narrowed to just $2.6 million in the first quarter.
I was a lot more excited about Duolingo stock late last year when it was trading at a single-digit multiple of trailing sales. After more than doubling this year, it's a lot riskier.
Now that Duolingo is trading up around 15.4 times trailing sales, any hint of a slowdown in its next several quarterly reports could lead to a punishing stock market beatdown. This is still a good stock to buy at this steep multiple, but only for investors who can tolerate the risk.
