Most people don't associate education with fun. The formal classroom setting can deliver a relatively bland learning experience, depending on the teaching methods and the content itself. But Duolingo (DUOL 3.64%) is flipping the status quo on its head.
The tech company operates the most successful digital language education platform in the world, and in the recent third quarter of 2023 (ended Sept. 30), it announced an expansion into math and music lessons as well.
Duolingo was already winning over investors this year with its powerful growth and a slate of artificial intelligence (AI) initiatives, but it's clear they've never been more impressed. Duolingo stock is now sitting on a whopping 186% gain for 2023, and it just set a new record high. But here's why it isn't too late for investors to buy in.
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Duolingo has developed a blueprint for success
Duolingo's mobile-first approach is the secret sauce behind its success. It places education in the palm of the user's hand, with an interactive experience designed to feel more like they're playing a video game than learning a lesson.
In the third quarter, Duolingo had 83.1 million monthly active users, an increase of 47% year over year. Most of them use the free version of the app, which is monetized through advertising. But the platform saw a whopping 60% increase in the number of paid subscribers during Q3, to 5.8 million.
Those paid users enjoy additional features and an expedited learning experience. But subscribers to the new, more expensive Duolingo Max tier also gain access to incredible artificial intelligence-powered features. Roleplay is one of them, which helps the user practice their conversational skills in a language of their choice. Another is Explain My Answer, which provides personalized feedback for each user based on their mistakes in a given lesson.
Duolingo has been developing AI since 2013, and it recently partnered with leading start-up OpenAI to accelerate its progress. Its users complete 10 billion lessons each week, so the company has more data with which to train AI models than any education provider in history. That's why it also uses technology to generate lesson content -- which used to be the job of its human staff members, who are now free to work on more impactful projects.
But as I touched on earlier, Duolingo is now using its blueprint for success in the language education segment to expand into math and music. The company already offered math lessons in a separate mobile application, but music is brand new, and both segments will now be integrated into the flagship Duolingo app. The company has two goals in mind: to increase the level of engagement among existing users and to capture new users by expanding Duolingo into other disciplines within the education industry.
Duolingo delivered exceptional revenue growth and a true profit in Q3
Duolingo originally forecasted $131 million in revenue for the third quarter, but it blew that number away by delivering $137.6 million. It was a 43% increase compared to the same quarter last year, and it prompted management to lift its full-year revenue guidance for 2023 by $12 million (at the high end of the range) to $528 million.
But the company also delivered its second consecutive quarterly generally accepted accounting principles (GAAP) profit, with a net income of $2.8 million. That was a huge positive swing from the $18.4 million net loss it generated in the year-ago period. GAAP profitability is often referred to as "true" profitability because it reflects the business's position exactly as it is, without stripping out one-off or non-cash expenses.
Why Duolingo stock is a buy now
Duolingo stock might be trading at an all-time high, but that doesn't mean it's too late for investors to buy in. Its core language education business has barely scratched the surface of its long-term opportunity because the company believes more than 2 billion people around the world are learning a foreign language.
However, moving Duolingo's math segment into its main app creates an opportunity for the company to solve a critical problem. In 2022, the average mathematics score for U.S. students in grade four was the lowest it has been since 2005. For students in grade eight, scores were at their lowest since 2003!
That data was released by the National Center for Education Statistics, which said an increase in remote learning was one reason for the slumping results. However, it highlighted a positive correlation between performance and access to a laptop computer or device, which means students scored better when using technology more frequently. Considering Duolingo's gamified, mobile-first approach, it could offer students an appealing way to learn beyond the traditional classroom.
That is an incredible opportunity for the company, which was perhaps overlooked until the segment's merger with the main app. Over the long term, I'd expect a substantial increase in the company's addressable market, which is why investors can still do well buying Duolingo stock now despite trading at its best-ever level.
