Education technology has, by and large, been a losing investment during the bear market and ensuing economic chaos of 2023. An owl named Duo has been holding its own, though. Duolingo's (DUOL 4.98%) family of education apps continues to win over lots of fans, translating to fast revenue growth. More importantly, in this present market, profitability is scaling nicely for Duolingo -- and could have room to run higher.
Shares of the education app company have rallied an impressive 130% so far in 2023 (as of early October). Is it too late to buy?
NASDAQ: DUOL
Key Data Points
Duo beats the competition in more ways than one
A slew of digital education services have popped up in the last decade, and a handful of them went public via initial public offering (IPO) during the pandemic. None of the stocks -- which include Coursera, Udemy, Chegg, and even Duolingo -- have done so hot.
Data by YCharts.
But Duo's rebound as of late has it reapproaching its peak from late 2021, shortly after its IPO. The secret? App users love the mobile experience, which started with language learning and has since expanded into other areas like reading and math. It's expected that app-based music lessons will make their debut by the end of 2023, too.
Hinting at the strength of the Duolingo learning experience, paid subscribers were up 59% to 5.2 million at the end of June 2023. The resulting full-year fiscal 2023 revenue is expected to be up to $516 million, up nearly 40% from 2022. Not bad for a year when global recession, hastened by inflation and U.S. Federal Reserve interest rate hikes, has been a constant worry.
But the real key to Duo's outperformance of peers has been the simultaneous focus on profit growth, not just revenue growth. First, on adjusted metrics, Duolingo has already generated positive free cash flow -- $78 million in the last reported 12-month period. Employee stock-based compensation was $86 million over that same period, so there's still room for improvement.
On a generally accepted accounting principles (GAAP) basis, Duo also just swung positive during its last reported quarter. Net income of $3.7 million got a big boost from interest income of $7.5 million on the company's cash and short-term investment war chest ($679 million at the end of June). Nevertheless, it's a big improvement from the quarterly net loss of $15 million reported a year ago.
Again, there's plenty of room for improvement, but Duolingo is just beginning to hit its stride as a profitable enterprise.
Time to buy or time to wait?
Investors who have been around a while have undoubtedly seen education technology stocks burst onto the scene and quickly flame out (for example, Rosetta Stone stock lost to the market overall, and its revenue suffered a steady decline for a number of years before eventually being taken private in 2020). Free-to-use services offered by the likes of Alphabet's Google, like Google Translate, have been tough to overcome.
Could Duolingo be different? Perhaps. But my primary issue at this moment is the premium price tag of 88 times trailing-12-month free cash flow. That kind of price tag assumes the rapid scaling of profitability in 2022 and 2023 will continue for some time.
I missed the huge Duolingo rally this year. I'm not one to chase hot stocks, hoping for a repeat performance. At some point, Duolingo stock is likely to hit some turbulence, so approach this software investment prudently. Duolingo has, nevertheless, earned a spot on my watch list because it has made good progress on the bottom line as of late.
