What happened

Shares of language learning app Duolingo (DUOL 3.64%) went up 101% in the first half of 2023, according to data provided by S&P Global Market Intelligence. That trounced the 15.9% gain for the S&P 500. And the primary catalyst during this six-month period was the company's financial results.

On Feb. 28, Duolingo reported financial results for the fourth quarter of 2022, during which it grew revenue 39% year over year. Then on May 9, the company announced financial results for the first quarter of 2023, reporting 42% top-line growth.

Another catalyst that can't be ignored was Duolingo's announcement regarding artificial intelligence (AI) on March 14. OpenAI's ChatGPT has captivated investors in 2023. And on the same day that OpenAI announced the next iteration of its technology with GPT-4, Duolingo announced that its Duolingo Max product would be powered by GPT-4 -- fortuitous timing for capturing attention. 

So what

What's perhaps most impressive with Duolingo's accelerating growth is the manner in which it's doing it. The company monetizes free users with ads, which generates relatively little revenue. The bigger revenue stream is from its paid subscription tier. 

Duolingo ended 2020 with 37 million monthly active users and 1.6 million paying subscribers. By the end of 2022, it had grown to 60.7 million monthly active users and 4.2 million paying subscribers.

To be sure, it was an incredible two-year run for Duolingo. But many digital platforms saw tremendous growth over this time and growth rates for most have since moderated. Investors were expecting the same with Duolingo -- it was logical to assume its growth rate would taper off or that it would even lose some paying subscribers who would trade back down to the free tier.

However, Duolingo is still growing at a blistering pace as it attracts new users. As of Q1, it had 72.6 million monthly active users, which was up 47% year over year. However, paying subscriber growth is even better. It now has 4.8 million paying users, up 62% from the prior-year period.

Duolingo Max adds to the intrigue here. Management is still testing it out, but Duolingo Max will boast AI abilities and more features overall. For this, it will charge more than the standard subscription tier, perhaps providing an additional boost to revenue growth as users sign up.

Now what

As a former linguist, I have reservations about Duolingo incorporating AI features into its language-learning platform. But as an investor, I have to admit that management has a good track record of vetting new features. The data-driven choices it's made so far have led to expectation-busting growth. Therefore, there's reason to give it the benefit of the doubt with Duolingo Max.

For 2023, Duolingo expects to generate at least $500 million in revenue, which would be 35% year-over-year growth. Investors will see if growth is still on track when the company reports financial results next month.