The language-learning company Duolingo (DUOL 0.55%) launched in 2012. Duolingo's mobile app is currently the third most popular app in the Apple App Store's education category, ahead of popular learning resources such as Instructure's Canvas platform and Alphabet's (GOOG 0.21%) (GOOGL 0.41%) Google Classroom. On Alphabet's Android Play Store, Duolingo sits at the very top of educational apps.
And its market popularity has resulted in financial windfalls. With advertising in the free app experience and two levels of premium subscriptions, Duolingo nearly tripled its annual revenue in three years. Currently, its trailing sales stand at $583 million. And $190 million dropped all the way through Duolingo's income and cash flow statements to be recorded as free cash flow in the last four quarters. That's a cash-based profit margin of 33% -- higher than both Apple's and Alphabet's.
But all that good stuff is in Duolingo's rearview mirror already. Where will the company go from here, and how much larger can it grow?
I think the company has a long and bright future, and will look very different in a few years. Here's how I expect Duolingo to evolve in the next five years.
Duolingo's grand ambition
The company's stated mission is to "develop the best education in the world and make it universally available."
Does that ring a bell? Maybe you're a longtime student of Alphabet's success story, built around the Google brand. That company's mission is "to organize the world's information and make it universally accessible and useful."
Duolingo's management doesn't get many points for originality here, but they certainly could have picked worse role models. When Alphabet was founded as Google, it was an experimental technology outfit with big dreams, modest sales, and a $15 billion market cap. Today, Alphabet is a sector-spanning and industry-defining giant with a $2 trillion market value and $328 billion in annual revenue.
I'm not saying that Duolingo is the next incarnation of Google/Alphabet, but the company's long-term mindset and grand ambitions are comparable.
In the long run, Duolingo's plan involves expanding the business from language learning to a general education system. Ironically, Duolingo's business is so heavily reliant on the American market that management isn't breaking out international results in its financial filings yet. The company rents small offices in China and Germany to help run the international expansion effort, but this tutor of over 40 languages is a nearly all-American business so far. And languages are pretty much the whole revenue stream at this point, as the newer music and math courses don't have many users yet.
But someday, Duolingo wants to offer online and mobile learning platforms for a broad range of subjects, such as history and sciences -- and the target market is about as big as the world.
"If you build it, they will come." That maxim works just as well for learning platforms attracting knowledge-hungry consumers as it did when the cinematic Field of Dreams attracted legendary ghosts.
NASDAQ: DUOL
Key Data Points
Duolingo's target market in 2034
Duolingo generated $622 million in total bookings last year, based on 6.6 million paying subscribers and 88.4 million monthly active users (including the ad-based, free-to-use service). That's about 0.4% of the dollar-based global market for online learning services. The market itself is expected to grow by 68% in the next half-decade, landing near $279 billion in 2029.
I think it's naive to assume that Duolingo's slice of this rapidly growing market will stay small. The company was founded by a MacArthur-certified genius, Luis von Ahn, who still runs the business today. Von Ahn has a knack for coming up with sticky ideas. For example, he invented the CAPTCHA test you regularly see on websites. The gamified learning experience known as Duolingo also stands a good chance of becoming a truly global phenomenon. These are just the early days of that worldwide expansion push.
The investing opportunity hiding in plain sight
Come back in five years and I expect you'll find Duolingo thriving on a whole new level. That will still be a bit early for it to have a full portfolio of alternative subjects, but there should be early tests of one or two new ideas -- alongside the more mature and popular math and music offerings.
If anything, Duolingo reminds me of Netflix (NFLX +0.96%) 13 years ago, in the summer of 2011. The digital media company had about 25 million subscribers to its name, just a handful of international clients in Canada, and annual revenue measured in single-digit billions of dollars. The online streaming service was still a free add-on to the red DVD-mailer envelopes -- and Netflix's most explosive growth period was right around the corner.
While the details are different, Duolingo's general situation is quite similar to that time at Netflix. It's a small company with big dreams, run by people with game-changing business ideas.
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I know I'm painting a mighty big picture here. Netflix and Alphabet are two of the most inspiring business stories I know, and it's a very good sign that I see reflections of their philosophies and histories in Duolingo's business plan. If you're following in somebody's footsteps, you might as well go with the greats.
Duolingo may not match the market-stomping success of its mentors, but the mere attempt should generate plenty of shareholder value. And it doesn't hurt to have a visionary MacArthur Fellow running the show.
