1 Unstoppable AI Stock Down 28% to Buy Before It's Too Late

Some technology sector stocks disappointed investors with their second-quarter earnings and saw their stock prices plunge. Other tech companies are proving they can navigate this tough economic environment and crush all expectations. Duolingo (DUOL 3.64%) falls into the latter category.

It just delivered a blockbuster quarterly result that beat estimates, and it also raised its full-year revenue forecast for 2023. Duolingo is the largest digital language education platform in the world, and it's now using artificial intelligence (AI) to accelerate its growth and deliver an even better learning experience for users. 

The education-focused tech company has a habit of outperforming expectations, and it partially explains why investors have sent its stock price soaring 107% so far this year. But Duolingo stock is still down 28% from its all-time high, which was set during the 2021 tech boom. Now might be a great time to buy before it recovers the rest of that lost ground. 

Duolingo is transforming education

Technology has created an opportunity for education providers to reach learners at a scale never before seen in history. That's why Duolingo took a mobile-first approach when designing its platform; its goal is to teach as many potential students as possible by placing lessons right in their pockets. Plus, it gamifies the learning experience with highly interactive lessons to boost engagement, which means users spend more time on the platform.

Since Duolingo's inception in 2011, over 500 million people have downloaded its mobile app and 74.1 million of them were using it actively every month in the second quarter of 2023. The latter figure was a 50% increase year over year. And since activating subscriptions in 2018 to give users access to more features, 5.2 million of those monthly active learners have become paying users. That was up 59% in Q2 and represented an all-time high.

Duolingo has now become the highest-grossing app in the education category in both Apple's App Store and Alphabet's Google Play Store.

But it's set to get even better thanks to the recent release of Duolingo Max, the platform's new top subscription tier, which introduces two new artificial intelligence-powered features. The first is Explain My Answer, which uses AI to give students personalized feedback based on their mistakes in each lesson. The second is Roleplay, which is a chatbot designed to help students practice their conversational skills in the language of their choice. Both are powered by a mix of OpenAI's ChatGPT and Duolingo's own AI developed in-house. 

The company is using AI behind the scenes, too. The technology helps employees craft lessons and write scripts, plus it also plays a role in designing, deploying, and grading questions in the Duolingo English Test, which has become an industry-recognized exam. 

Duolingo topped expectations in Q2

Duolingo generated $126.8 million in revenue during Q2, which was a 44% year-over-year increase, and it was also comfortably above the high end of its forecast ($125 million). The strong result prompted the company to increase its full-year revenue guidance for 2023, and it now expects it could generate as much as $516 million. 

Like most high-growth technology companies, Duolingo is sacrificing profitability right now in order to invest more money in customer acquisition and product development. But in light of the tough economic conditions over the last 18 months, it has carefully managed costs in an attempt to deliver a profit. 

In the second quarter, the company only increased its operating costs by 23% year over year, which means the costs grew at a far slower pace than revenue, and that led to more money flowing to the bottom line. As a result, Duolingo delivered a net income (profit) of $3.7 million -- a big improvement from the $15 million loss in the same quarter last year.

Plus, Duolingo is unique compared to many consumer technology companies in that it spends very little money on marketing. In fact, that line item only represents about 18% of its total operating costs. Most of the platform's user acquisition is organic, coming by way of word of mouth and engaging social media campaigns. That helps reduce its customer acquisition costs, which makes it much easier to run a profitable enterprise. 

Why Duolingo stock is a buy right now

Duolingo estimates over 2 billion people are learning a foreign language worldwide, and the addressable market for digital platforms in that segment could top $47 billion by 2025. Based on the company's active user base and its forecast 2023 revenue of $516 million, it has barely scratched the surface of its opportunity so far. 

Plus, Duolingo's growth in paying users could be accelerated by its new AI-powered features, which truly reshape the learning experience. They're designed to rival a personal tutor, yet at just $30 per month, the Max subscription is far cheaper than the real thing. 

As I mentioned at the top, Duolingo stock has more than doubled in price in 2023, though it remains 28% below its all-time high. But if the company continues to crush its financial forecasts and remains profitable in the process, it probably won't be long before the stock hits new record levels.