When I talk about "stocks to hold forever," you'll usually see a proven heavyweight like Amazon (NASDAQ: AMZN) or Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). They are battle-tested heavyweights with robust and flexible business models, poised to compete and generate market-beating stock returns for many years or even decades to come. I stand by these surefire recommendations. Of course. You can't go wrong with market-defining superstars whose market caps are measured in trillions of dollars.
But that's not the only way to go. From time to time, a new company comes along with its sights set on long-term growth. The story may be in its first few chapters, or early innings, or the opening drive of the first quarter, but the durable money-making outcome already seems obvious.
That's what Motley Fool co-founders Tom and David Gardner saw in Amazon 22 years ago, laying the groundwork for a 22,700% return on their first Amazon investment.
The biggest winner in my own portfolio has the same backstory: I expected big things from Netflix (NASDAQ: NFLX) when video rentals were handled with DVD mailers, not digital streaming. I doubled down on that investment when bearish investors saw a game-breaking mistake in the Qwikster debacle of 2011, and that stake has gained 4,600% in 12 years.
I see a similar future unfolding for language-learning specialist Duolingo (DUOL 3.64%). Like Netflix and Amazon in the early going, Wall Street at large doesn't seem to have the same vision of Duolingo yet. The stock currently trades 22% below the all-time highs it reached in December.
You should consider picking up a few shares of Duolingo at this modest discount, because I'm not sure the stock will ever be this cheap again.
Duolingo's expansive educational ambitions
First and foremost, I see an unstoppable online education juggernaut going through the toddler stage right now. Everybody knows Duolingo as a pure-play expert in language training, but the grand vision is much larger. The company already offers courses in math and music, built with the same look, feel, and educational approach as the languages. Founder and CEO Luis von Ahn wants to apply the same method to many more subjects over time.
"By adding new subjects into the main app, we believe we can more rapidly scale these new subjects with our gamification mechanics like streaks, leaderboards, and quests that have been so effective in the language learning app," von Ahn said in November's third-quarter earnings call. "Over the long term, the hope is that Duolingo gets known, not just as a language learning app but also as an app where you can learn math and music, so it will start attracting users for that. And a lot of the monetization experiments that we run will apply to math and music."
Furthermore, Duolingo already relies of artificial intelligence (AI) in many ways. The ultra-premium Duolingo Max subscription level provides lesson feedback and casual conversation features based on OpenAI's ChatGPT. It won't surprise me to see more generative AI features rolling out over the next few years, as Duolingo gets a sense of where this technology can boost the platform's educational chops and inspire more premium service subscriptions.
The company will continue to focus on language learning for the foreseeable future, treating math and music as add-on experiments and leaving other subjects untouched for a while. The two new courses were launched in the fourth quarter, are only available on Apple iOS systems so far, and won't be meaningful contributors to the top or bottom line in 2024. Adding more subjects before music and math move out of the experimental stage wouldn't make much sense.
But in the long haul, you should expect Duolingo to explore a lot of new subjects. This approach is key to the company's game-changing growth prospects.
"Our belief is that there are things that make a lot of sense to learn with the Duolingo app. They are usually things that you can learn on your own that take a long time to learn where the thing that you're learning requires a lot of repetition," von Ahn said. "Things that require a lot of repetition, that take a long time to learn and also that we think will have a very large audience. These are the types of things that we will be adding to the app."
How Duolingo's projected growth translates into strong shareholder returns
To be clear, languages provide a robust platform for von Ahn's larger ambition. Duolingo is an established leader in this category, but is still only "scratching the surface" of its target market, according to the CEO.
Language learning was a $40 billion market in 2022 with a projected compound average growth rate (CAGR) of 10.6% per year between 2023 and 2028, according to market research firm Reportlinker. Duolingo's annual revenues stopped at $339 million in 2022 and $484 million today, showcasing how small the company's revenue share is so far -- and how fast it is growing.
And you don't have to settle for a traditional growth stock sacrificing short-term profitability to finance their top-line growth. Duolingo generated $106 million of free cash flow over the last four quarters, which works out to a cash-based profit margin of 22%.
DUOL Revenue (TTM) data by YCharts
Yes, Duolingo's stock is a bit pricey at 17 times sales and 71 times free cash flows, but Netflix and Amazon were also often seen as expensive and speculative early on. That didn't stop early investors from pocketing generous returns over the years, as each company's ambitious vision turned into real-world business results.
I'm comparing Duolingo to some of the market's biggest long-term winners. Feel free to do your own research before taking action on Duolingo, but don't be surprised to find yourself nodding along to my conclusion. Duolingo looks like a no-brainer buy right now, despite its lofty valuation ratios.
