The stock market is in the middle of an important earnings season and companies are giving investors useful insights about how they finished the year amid a challenging economic climate that includes the highest interest rates in 23 years.
Digital language education provider Duolingo (DUOL 3.64%) and insurance technology company Lemonade (LMND 1.64%) are expected to report their latest results at the end of February. Both businesses are sensitive to changes in consumer spending, but they delivered strong growth during the first three quarters of 2023 despite the economic headwinds. That bodes well for their upcoming reports.
Investors shouldn't necessarily make decisions based on one quarterly performance, but each report could solidify a positive trend and increase their conviction. If you're sitting on idle cash -- money you don't need for immediate expenses -- here's why you might want to allocate $200 to buy shares in Duolingo and Lemonade now, with the intention of holding for the long term.
1. Duolingo
Duolingo is the largest language education platform in the world. It takes a mobile-first approach, so its intuitive, interactive lessons are accessible to everyone, at any time. At the end of 2023's third quarter, Duolingo had 83.1 million monthly active users, which was an impressive 47% increase compared to the year-ago period.
Duolingo's basic program is free, but a record 5.8 million of its users in Q3 paid a monthly subscription to enhance their learning experience. That figure grew by 60% year over year, so the number of paying users is increasing quicker than the number of monthly active users overall. That highlights how valuable the platform is for learners.
Duolingo turned to artificial intelligence (AI) to create new revenue opportunities. The company launched a next-level subscription tier last year called Max, which provides users with two new AI-powered features. Explain My Answer gives each user personalized feedback based on their mistakes in each lesson, and Roleplay is a chatbot with which users can practice their conversational skills in the language of their choice.
Both features are powered by a combination of Duolingo's own AI models, which have been in development since 2013, and OpenAI's GPT-4 models. Duolingo users complete 10 billion lessons every week, so the company has more data with which to train AI models than any other education platform, placing it in a great position to benefit as the technology advances.
Duolingo generated $137.6 million in revenue during Q3, which was a 43% year-over-year increase and also comfortably above its prior forecast. The company expects to have generated up to $528 million in full-year revenue for 2023 when it reports its results later this month. That forecast was revised higher three times throughout the year because Duolingo kept beating its own estimates despite the pressure on consumers from high inflation and rising interest rates.
Duolingo stock has declined 16% so far in 2024, but I think it's merely taking a breather considering it more than tripled in 2023 and set a new all-time high. The company says its addressable market consists of 2 billion foreign language learners worldwide, so it has barely scratched the surface of its opportunity. Therefore, the recent weakness in its shares looks like a chance for investors to buy.
2. Lemonade
If you're like me, you probably don't enjoy dealing with your insurance company. That is especially true if you have ever made a claim, as the process can be lengthy and convoluted during a time when your stress levels are already running high. Lemonade is on a mission to reshape the customer experience with the help of AI.
Lemonade operates in five insurance markets: renters, homeowners, life, pets, and auto. Its website is home to an AI chatbot called Maya, which is capable of writing a quote for a new potential customer in 90 seconds. Then there is AI Jim, which holds the world record for the fastest insurance claim payout ever: It was completed in just two seconds.
Under normal circumstances, AI Jim attempts to pay claims in less than three minutes with no human intervention. That means no lengthy phone calls or prolonged waiting periods.
It's no surprise Lemonade has attracted 2 million customers since it was founded in 2015. In the third quarter of 2023, its in-force premium hit an all-time high of $719 million, as did its average premium per customer, which came in at $362. That suggests more customers are opting for multiple Lemonade policies, so the company's approach is resonating.
Lemonade is also using AI extensively in the background to ensure it is pricing premiums fairly. Its Lifetime Value 6 (LTV6) model calculates premiums based on a customer's likelihood to make a claim, their likelihood of switching insurers, and their likelihood of buying multiple policies, to name just a few data points. Lemonade recently launched LTV7 and LTV8, and LTV9 is on the way, with each AI model more advanced than the last.
Lemonade generated $314.3 million in revenue during the first three quarters of 2023, an 87% increase from the same period in 2022. But its stock price is down 90% from its all-time high, which was set during the tech frenzy in 2021. Investors ascribed an irrational valuation to the company back then, but the business is also still scaling and hasn't yet achieved profitability. That adds risk for investors, although management has said Lemonade shouldn't require any further funding to turn profitable from here.
With that in mind, and given Lemonade's incredible growth, the steep discount in its stock price might be an opportunity to buy in. It might be especially attractive to investors who want a slice of a company that is already successfully monetizing AI.
