Finding a beaten-down stock that is still underpinned by strong fundamentals is a great feeling, because it often represents a clear buying opportunity. But with the Nasdaq Composite up 27% this year, many quality technology stocks have surged, which can make investors feel like they've missed the boat.
It seems counterintuitive to buy a stock after it has already doubled in a short period of time, but I'll explain why Duolingo (DUOL 3.64%) is worthy of a spot in your portfolio even after a 135% gain in 2023.
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Duolingo is the global leader in digital language education
Technology has transformed many aspects of everyday life, and education might be one of the most significant. Smartphones place all the information in the world at our fingertips, and Duolingo is harnessing that platform to teach its users their choice of more than 40 languages.
The Duolingo mobile application has been downloaded more than 500 million times, and owes its popularity to its game-like interactive approach to education. Users can progress through coursework at their own pace, which makes for a convenient learning experience, though the platform rewards consistency by tracking their daily log-in streak. And for those wanting to speed up their progress, Duolingo offers paid subscriptions that unlock additional features.
Artificial intelligence (AI) is set to make that learning experience even more effective. Duolingo has been experimenting with the technology for around a decade, but a partnership with ChatGPT developer OpenAI has accelerated its efforts.
The company just launched a new paid subscription tier called Duolingo Max, which delivers two AI-powered features. Explain My Answer offers personalized feedback to users who make mistakes in a given lesson, and Roleplay is a chatbot to help users improve their conversational skills.
Duolingo is also using AI behind the scenes. OpenAI's GPT-4 technology can generate text in multiple languages, so it's helping employees craft lesson content, which saves time, allowing them to work on more projects.
Duolingo continues to add users at a rapid pace
The platform continues to see substantial growth in users and monetization. By the second quarter, it had 74.1 million monthly active users, a 50% year-over-year increase.
The growth in paid subscribers was even more impressive. Duolingo had 5.2 million in the second quarter, up 59% year over year. They now represent 7.9% of the monthly active user base, which is an all-time high, and that percentage has the potential to climb even further thanks to the rollout of the app's new subscriber-only AI features.
Duolingo is now the highest-grossing education app in both the Apple App Store and Alphabet's Play Store.
Remarkably, the company could still have substantial growth potential because it estimates more than 2 billion people globally are learning a foreign language. It continues to build traction in key markets like India, where smartphone and internet adoption are still ramping up.
There's strong demand in that country for the Duolingo English Test, which is recognized by more than 4,500 leading universities, as citizens seek to improve their language skills to study and work abroad.
The stock is a buy based on the company's financial performance
Duolingo stock soared this year for good reason. While many other tech companies are experiencing a slowdown due to the challenging economy, consumers are clearly still willing to invest in language education. Duolingo generated $126.8 million in second-quarter revenue, a 44% jump year over year that also topped the high end of the company's forecast of $125 million.
Profitability was the big surprise in the quarter. After years of operating under a growth-at-all-costs strategy, Duolingo delivered $3.7 million in net income, a big swing from its $15 million net loss a year ago.
One of the great things about the business is that it doesn't spend much on marketing, because 90% of its customer acquisition comes through word of mouth, social media posts, and other organic sources. In the second quarter, its marketing spend represented just 14% of revenue.
The stock is up 135% in 2023, but it remains 17% below its all-time high, which was set during the tech frenzy of 2021, and that's one reason it's not too late to buy in.
Another reason is the platform's paid-user subscriber base, which continues to grow as a percentage of active users. It implies that even if Duolingo stops acquiring new users, its revenue will continue to increase (albeit at a slowing rate). That's a great dynamic in a tough economy because it gives the company lots of financial flexibility.
Duolingo stock can add a dash of quality to any portfolio, so investors who don't own it yet shouldn't be deterred by the stock's gains this year.
