Extreme growth can be risky. When a company optimizes its revenue growth above all else -- profits can wait! -- most valuation metrics are meaningless since cash flows and earnings tend to be negative. And the growth stories don't always have a happy ending. The high-flying market darlings of today can crash and burn tomorrow.
At the same time, the big winners in this category can mop the floor with the best value stocks. It's an intense risk/reward balance and not every investor's cup of tea. Just give your portfolio a solid foundation of robust value-preservation ideas and a healthy mix of diversified hypergrowth bets, and you're good to go.
This approach is not as predictable and safe as classic value investing in the mold of Warren Buffett and Benjamin Graham, but you don't have to get every call right and one prescient purchase of a future industry giant makes up for many duds.
That said, I have two impressive hypergrowth stocks on tap for you today, and both of them look like potential winners in the long run. Read on to see how Duolingo (DUOL 3.64%) and Monday.com (MNDY 2.81%) are poised to deliver game-changing growth in the years ahead.
Online language learning today, a full-blown digital school in the future
Duolingo is not just a tool for learning new languages; it's evolving before our eyes into a comprehensive digital education platform. Its current success and future ambitions make it one of the most exciting prospects in the landscape of hypergrowth tech stocks.
The language-learning service is on a roll, consistently lifting its quarterly sales by more than 40% year over year since entering the public stock market in the fall of 2021. That high-octane sales growth would be impressive enough in a normal economy. It's a mind-blowing achievement when those numbers were delivered across the lifespan of an inflation-driven economic crisis.
DUOL Revenue (TTM) data by YCharts
[chart showing DUOL revenues and rev growth since the fall of 2021]
So the language-learning system is firing on every cylinder, setting the company up for years of continued hypergrowth. On top of that, "Yo soy Duo" is only the beginning of a much larger long-term ambition.
Founder and CEO Luis von Ahn is building a learning platform for pretty much any subject. Courses in Spanish, Ukrainian, and Klingon are a good starting point, allowing the company to polish and refine the learning experience based on feedback from a large, global user base. But Duolingo launched a basic math app last October, followed by a kid-friendly learn-to-read app the next month.
And Duolingo has many more subjects in mind. There's a music app in the works. Further down the line, we should see Duolingo-branded learning platforms for things like physics and history. von Ahn says it's too early to get into specialized language variants yet, such as English for medical or legal professionals, but it's an interesting idea that could be worth exploring later on.
The company already jumped aboard the artificial intelligence (AI) bandwagon, too. Duolingo is adding generative AI tools to a new ultra-premium service version known as Duolingo Max. The AI chatbot can analyze your responses, explain what's wrong when you make a mistake, and suggest personalized methods to nail down that lesson. It also adds an interactive conversation feature with an open-ended creative flair.
"Roleplay is a lot more interesting. Before, it was probably a dry conversation where you have to maybe just order a croissant," von Ahn said in the second-quarter earnings call two weeks ago. "Now you may order a croissant but, I don't know, something like a burglar enters and something weird happens in the middle. So, mayhem happens, and it's a much more interesting conversation." (Edited for clarity.)
Duolingo's innovative spirit is an important part of my investment thesis. The stock isn't cheap, trading at 13 times sales with negative earnings and barely there free cash flows, but that should change as the company matures. Duolingo is still in its pedal-to-the-metal hypergrowth phase. Slower growth and wider profit margins will come later. In the meantime, the stellar top-line growth is building a stable user base for the long haul.
Transforming teamwork with low-code flexibility
Monday.com offers a unique spin on project management. Its cloud-based asset management, team collaboration, and project management tools are can be tailored to fit the unique needs of any organization. The Monday.com Work OS platform is a development system as much as it is a ready-made management tool. And most of the customization can be done through drag-and-drop development tools instead of cryptic program code. Naturally, the coding toolkit now includes an AI assistant for easy inclusion in those customized workflow and project management apps.
Companies of every stripe love this low-code flexibility. Monday.com's net dollar retention rate among expiring contracts was 110% in the second quarter, meaning that the average contract was renewed with a 10% larger payment. The dollar retention rate jumped to 120% for customers with annual recurring revenue (ARR) of $50,000 or more. The company had 1,892 paid platform subscribers in that class of substantial ARR, up from 1,160 in the year-ago period.
That's a 63% increase in large customers, driving a 43% year-over-year boost to second-quarter revenues. That's actually a slowdown from nearly doubling in the late 2021 and early 2022. Management reported a slower expansion of seat licenses per customers in the second quarter, driven by tight IT budgets in a difficult economy.
It's not the end of Monday.com's hypergrowth as we know it. CFO Eliran Glazer sees "positive signs of getting back into deals" nowadays. The uptick isn't strong enough to call it a trend yet, but hesitant customers are talking about contract upgrades again.
This stock's valuation metrics look a lot like Duolingo's. The stock trades at 13 times trailing sales, bottom-line earnings are negative, and cash flows are slim. This is High-growth Business Management 101 in action, folks. We are looking at the early days of potentially huge business empires in both cases.
There's no such thing as a risk-free investment and these high-octane growth stories should be handled with nerves of steel. That's OK. Let's say you invest $1,000 in Duolingo and $1,000 in Monday.com today. If one of them goes bankrupt but the other triples in ten years, the $2,000 investment will be worth $3,000 in the end. That's a hypothetical scenario, of course, and I expect both stocks to do well in the long run. I'm just making it clear that it's not a disaster if one company stumbles in a well-diversified stock portfolio.
