Duolingo (DUOL 3.64%) operates the world's largest digital language education platform. The company consistently exceeded its own financial forecasts throughout 2023, which sent its stock 218% higher for the year. That was almost as strong as the 239% gain posted by Nvidia -- the best-performing stock in the entire S&P 500.
Part of Duolingo's recent success can be attributed to the adoption of artificial intelligence (AI), which is creating new monetization opportunities. The company intends to use AI even more deeply in 2024, which could further supercharge its results.
Duolingo's forecast points to another year of strong revenue growth ahead, but if history is any guide, the company is likely to far exceed expectations. Here's why it's not too late to buy Duolingo stock despite its powerful recent gains.
Duolingo is transforming education
An estimated 2 billion people are learning a foreign language worldwide. Language lessons are often an extracurricular activity people complete outside of their regular work or study hours, so what better way to address that enormous market than through a mobile application students can pick up at any time? That's Duolingo's approach; it transforms smartphones into a vessel for engaging, interactive lessons people can take at their own pace.
The Duolingo experience is more akin to playing a game than learning a language, and that's why it's so popular. The platform had 88.4 million monthly active users in the fourth quarter of 2023, which was a 46% increase from the year-ago period.
But here's the real story: A record-high 6.6 million of those users were paying for subscriptions in Q4, which was a 57% increase. Duolingo offers three subscription tiers to help users accelerate their learning experience, but its most expensive tier -- the Max subscription -- also offers two unique features powered by AI.
Explain My Answer uses AI to give users personalized feedback when they make mistakes, and Roleplay uses an AI chatbot to help users practice their conversational skills. Over 10 billion lessons are completed on the Duolingo platform each week, so the company has more data with which to train its AI models than any education platform in the world. Its goal is to deliver a learning experience that is equivalent to using a human tutor, and as these AI features grow more advanced, their capabilities will likely entice more free users to pay for subscriptions.
Duolingo is also focused on expanding its product portfolio. It already had a separate education app for math learners, and it also launched a music learning platform last year. Both of those products are now integrated into the flagship Duolingo language platform, so users can easily switch between disciplines.
Duolingo beat its revenue expectations throughout 2023
Duolingo generated $531.1 million in revenue during 2023, which was a 44% year-over-year increase. It was also above the company's latest forecast of $528 million, a number it raised three times throughout the year because its quarterly results kept topping expectations. That set Duolingo apart from many other tech companies that slashed guidance because high inflation and rising interest rates that cut into consumer spending.
Duolingo also delivered its first annual GAAP profit with a net income of $17.7 million, which was a positive swing from the $58.6 million net loss it generated in 2022. Its preferred measure of profitability is adjusted EBITDA (earnings before interest, tax, depreciation, and amortization), which came in at $93.7 million, a 166% increase from 2022.
Adjusted EBITDA strips out one-off and non-cash costs like stock-based compensation, so it can help investors better understand the profitability of Duolingo's actual operations. The company's forecast suggests the metric could come in as high as $171.4 million in 2024.
Around 90% of Duolingo's user growth is organic, so its sales and marketing costs are relatively small. For example, it only spent $75.7 million on that line item in 2023, which accounted for just 18.8% of the company's total operating costs. That allows Duolingo to allocate more money to research and development, where it spent $194.3 million. That helps accelerate the creation of new features, especially those powered by AI.
Image source: Getty Images.
Why Duolingo stock is a buy now
With around 2 billion people worldwide learning a foreign language, Duolingo has only scratched the surface of its opportunity based on its monthly active user base, which means it has a long runway for growth.
Duolingo is forecasting up to $729.5 million in revenue for 2024, which would represent 37% growth compared to last year. Interestingly, the company only forecasted 35% revenue growth for 2023, and we know it crushed expectations.
Consumers could be in better shape in 2024 considering inflation has come down substantially over the last 12 months, and the U.S. Federal Reserve could soon begin to cut interest rates. Therefore, Duolingo could trounce its forecast yet again.
Despite Duolingo stock trading close to its all-time high, investors who buy it in 2024 might be glad they did when they look back on this moment five years from now.
