Duolingo, Inc. (DUOL) dominates the digital language learning market with its engaging, game-like approach. Known for its green owl mascot, the company offers lessons in over 40 languages through a freemium model and has seen rapid growth in both user base and paid subscriptions.

DUOL’s expanding user base is evident by its impressive growth in daily active users, which reached 31.4 million in the first quarter, a significant increase from 20.3 million the previous year. Moreover, the number of paid subscribers has jumped 54% year-over-year to 7.4 million, raising the proportion of paying users from 8% to 8.6%.

Building on its commitment to innovation, Duolingo unveiled AI-driven features to enhance the learning experience in March. The premium subscription tier, Duolingo Max, offers users access to powerful AI tools like Roleplay, an AI chatbot for conversational practice, and Explain My Answer, which provides personalized feedback on lesson mistakes.

“We believe that we are still in the early stages of our monetization journey, and discovering multiple avenues to enhance bookings. We’re excited about the broader rollout of Duolingo Max, our higher-priced subscription tier, and the strides we’re making to improve our family plan,” said Luis von Ahn, Co-Founder and CEO of DUOL.

Furthermore, the company comprehensively surpassed Wall Street’s EPS and revenue estimates. For the first quarter, DUOL’s earnings per share was 116.9% above the consensus estimate, and its revenue was higher than the analysts’ estimates by $1.90 million.

Shares of DUOL have gained 19.8% in the past nine months and 45.4% over the past year to close the last trading session at $196.71. However, the stock has plunged 13.3% year-to-date.

Let’s look at factors that could influence DUOL’s performance in the upcoming months.

Strong Financial Performance

In the first quarter that ended March 31, 2024, DUOL’s net revenues increased 44.8% year-over-year to $167.55 million, with a 53% growth in its subscription revenue of $131.69 million. Its gross profit grew 45.4% from the year-ago value to $122.36 million.

The company’s income from operations amounted to $16.44 million compared to a loss of $8.52 million in the previous year. Its adjusted EBITDA increased by $28.90 million year-over-year to $44.01 million. Moreover, its net income was $26.96 million or $0.57 per share, compared to a net loss of $2.58 million or $0.06 per share in the previous year.

As of March 31, 2024, its cash, cash equivalents, and restricted cash amounted to $832.45 million, reflecting a 29.8% increase from the prior-year period. Also, its free cash flow improved by 176.5% from the prior-year quarter to $79.62 million.

Impressive Historical Growth

Over the past three years, DUOL’s revenue has grown at a CAGR of 45.6%. In addition, the company’s total assets have grown at a CAGR of 82.1% over the same period, and its levered free cash flow has improved at a 79.9% CAGR.

Favorable Analyst Estimates

Analysts expect DUOL’s revenue for the fiscal second quarter (ended June 2024) to increase 39.6% year-over-year to $177.08 million. Its EPS for the to-be-reported quarter is forecasted to register a robust 299.2% year-over-year growth, settling at $0.32. Furthermore, the company topped the consensus revenue estimates in each of the trailing four quarters, which is excellent.

For the fiscal year ending December 2024, the company’s EPS is anticipated to grow 380.6% year-over-year to $1.68, while its revenue is expected to increase 38.1% from the prior year period to $733.57 million.

Mixed Profitability

DUOL’s trailing-12-month gross profit margin of 73.28% is 98.5% higher than the 36.92% industry average. Likewise, its trailing-12-month net income margin of 7.82% is 64.3% higher than the industry average of 4.76%. In addition, the stock’s 26.33% trailing-12-month levered FCF margin compares to the 5.49% industry average.

However, the stock’s trailing-12-month ROCE and ROTC of 7.15% and 1.10% are 39.8% and 82.6% lower than the respective industry averages of 11.88% and 6.31%. Also, its trailing-12-month EBITDA margin of 3.32% is unfavorably compared to the industry average of 11.34%.

Stretched Valuation

In terms of forward non-GAAP P/E, DUOL is trading at 50.08x, 232.3% higher than the industry average of 15.07x. The stock’s forward EV/EBITDA of 44.22x is 370.2% higher than the industry average of 9.40x. Also, its forward EV/Sales of 10.51x compares with the 1.17x industry average.

Furthermore, DUOL’s forward Price/Sales multiple of 11.56 is significantly higher than the industry average of 0.88. The stock’s forward Price/Cash Flow of 38.97x is 321.6% higher than the industry average of 9.24x.

POWR Ratings Exhibit Mixed Prospects

DUOL’s stance is apparent in its POWR Ratings. The stock has an overall rating of C, which translates to Neutral in our proprietary rating system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. DUOL has an A grade in Growth, which is in sync with its solid financial performance in the last reported quarter and impressive historical growth. Its optimistic analysts' estimates justify its B grade for Sentiment.

On the other hand, the stock has a D for Value, consistent with its higher-than-industry valuation. Also, with a 24-month beta of 1.42, the stock has earned a grade of D for Stability.

DUOL is ranked #72 out of 135 stocks in the Software - Application industry. Click here to access DUOL’s Momentum and Quality ratings.

Bottom Line

DUOL’s top and bottom-line increase in margins and profits reflect its effective leveraging of economies of scale, drawing in a substantial influx of new users and successfully converting them into paying subscribers. With the digital language learning market projected to exceed $101.94 billion by 2032, the company's current revenue forecast ($726.5 million to $735.5 million) only scratches the surface of its vast growth potential, leaving more room for growth.

Moreover, as analysts foresee robust triple-digit earnings growth in the upcoming quarterly results and a promising outlook for the year, Duolingo seems well-positioned to impress investors.

However, given DUOL’s elevated valuation, mixed profitability metrics, and enhanced volatility (24-month beta of 1.42), it could be wise to wait for the better entry point in this popular language app stock now.

How Does Duolingo, Inc. (DUOL) Stack Up Against Its Peers?

While DUOL has an overall grade of C, equating to a Neutral rating, you may also check out these A (Strong Buy) rated stocks within the Software - Application industry: Yalla Group Limited (YALA), TeamViewer SE (TMVWY) and IBEX Limited (IBEX). For exploring more A-rated Software - Application stocks, click here.

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DUOL shares were trading at $185.89 per share on Tuesday afternoon, down $10.82 (-5.50%). Year-to-date, DUOL has declined -18.06%, versus a 17.91% rise in the benchmark S&P 500 index during the same period.

Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.

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