Shares of app-based education company Duolingo (DUOL -1.92%) dropped 17.6% during July, according to data provided by S&P Global Market Intelligence. Without any news to excite investors, the stock drifted lower throughout the month. But that's already changing in August with the release of its latest quarterly earnings report.
The S&P 500 was up 1% during July so it may be surprising to some that this was its worst July in a decade. In short, market conditions weren't ideal for many stocks, including Duolingo. The company did acquire animation studio Hobbes early in the month for an undisclosed amount. But this news was hardly enough to keep shares from drifting lower while the market cooled off.
Things changed for Duolingo on Aug. 7 when it reported financial results for the second quarter of 2024. In short, the business is growing at an impressive rate and faster than expected. Moreover, management raised its full-year guidance. And this has the stock bouncing back.
The profitable growth train keeps chugging
It seems like all of Duolingo's Q2 numbers were impressive. Monthly active users have now surpassed 100 million. The company's revenue was up 41% year over year to $178 million thanks to 52% growth in paid subscribers. And this impressive growth resulted in Q2 free cash flow of nearly $55 million compared with free cash flow of just $34 million in the prior-year period.
For Duolingo, it all starts with user growth and engagement. Obviously it needs users if it's going to generate revenue. But highly engaged users are also needed -- either they'll use the free version and generate more ad revenue through high engagement or they'll be so engaged they'll pay for a subscription.
Duolingo consistently excels in driving user engagement. Management seems to understand what works and that's where its acquisition of Hobbes comes in. Hobbes really has little to do with education -- it's an animation studio. But by improving its animation, Duolingo improves the user experience by making it more fun and visually appealing.
Exactly two years ago, Duolingo had just 50 million monthly active users. Now it has well over 100 million. Therefore, I believe management deserves credit in making the right engagement-driving moves.
More growth to come
Duolingo expects to generate full-year revenue of $731.3 million to $738.3 million, which represents about 38% to 39% year-over-year growth. That's extraordinary. Moreover, it does expect to be profitable, a rare feat for high-growth companies.
Trading at a little more than 10 times its expected full-year sales is a somewhat pricey valuation for Duolingo, which is one of the only reasons to be cautious with this stock today. But the business fundamentals remain quite strong for investors looking ahead.
