Duolingo Stock: Here's What Real AI Winners Look Like
Duolingo's stock has more than tripled in value over the past two years. That makes it one of the largest positions in my portfolio. Isn't it time to take some profits?
It was just two years ago that I first told the Duolingo investment story here (on my German blog, because my SubStack wasn’t born yet ;-). At the time, the stock was trading at 73 USD, well below its 102 USD IPO price. What followed was an amazing success story for the company, which literally crushed its own expectations and those of analysts quarter after quarter.
As a result, Duolingo's stock has reached new heights, more than tripling in value over the past two years. Today, the stock is trading at around 280 USD, making it one of the largest positions in my portfolio.
Isn't it time to take some profits? That's what this update is all about:
Duolingo's latest Business Figures Q2 2024
Duolingo's success is based on a user base that continues to grow strongly: monthly active users grew by another 40% to 103.6 million in Q2 2024. The number of paying subscribers grew by 52% to 8 million.
This means that Duolingo is now a mass phenomenon in many countries and has left all competitors in the online learning sector far behind.
Revenue and profit growth is at least as impressive as user growth. After a further growth of almost 44% to 531 million USD in 2023, the increase in revenues in the first half of 2024 was again over 40%.
The rapid expansion of the business is also reflected in a rapid increase in profits: a net profit margin of 14% was already achieved in Q2 2024 (after 3% in the same quarter of the previous year). The free cash flow margin was already over 30% in Q2 2024, with purely organic revenue growth of over 40%.
So the Rule of 40 (explained here) is over 70%. I know of no other company of this size that is growing so efficiently.
This is the stuff of tenbagger dreams.
The AI Misunderstanding
Nevertheless, the first half of 2024 saw a 32% drawdown, meaning that Duolingo's share price lost almost a third of its value between May and July 2024.
The reason for the temporary drop in share price was that Duolingo was mistakenly seen by some analysts as the loser of the AI age in the general AI hype. It was often argued that Duolingo could be disrupted by the ever-improving AI tools for simultaneous translation that e.g. Google is developing and building into its devices.
I never understood these concerns: It's all well and good if a smartphone or even AR glasses can really help you communicate with a person in another language. But I can't imagine that in the future people will lose the need to learn a language that they need regularly in their professional or private life without having to rely on technical communication aids.
These concerns have since been allayed, and Duolingo's management has been able to convince investors that the company will be one of the big winners from the new possibilities offered by AI.
This was achieved through good communication around the quarterly reports and a strong presentation of the new features at the annual Duocon user conference.
In fact, Duolingo benefits twice from the new possibilities of Generative AI: on the revenue side, through new features that can be directly monetized, and on the cost side, by making product development much more efficient. For a better understanding, I recommend taking a look at Duocon:
1. The Revenue Side: New Gen AI-based Features
The new video call feature is a big step forward for online language learning. With this AI-powered tool, learners can have spontaneous short conversations with Lily, one of the most popular characters in the Duolingo world. The technology is designed to simulate natural dialogue and provide a personalized, interactive practice environment.
The ability to converse in real time means that even beginners can build the confidence they need to communicate effectively in real-life situations. To make it even more engaging and realistic, Lily remembers conversations and adapts to the learner's level.
These advanced AI features are only available by upgrading from Super Duolingo (the name of the product for paying customers) to Duolingo Max. This new AI powered product is about twice as expensive as the "normal" Duolingo subscription.
This AI upgrade will be rolled out to 8 million paying subscribers over the coming quarters. The resulting revenue stream should keep revenue growth above 30% for some time, even if new customer growth slows. In my opinion, the current analyst estimates for Duolingo have not yet sufficiently taken this effect into account.
2. The cost side: AI helps with product development
AI is just as important to Duolingo's product development, as it is the only way to create millions of graphically illustrated language lessons with unprecedented efficiency. Watch the video below to see how AI plays an important role in Duolingo's product development.
„At Duolingo, we are all in on AI. And when AI is in the hands of the right experts, it can create magic. And it’s that magic that keeps you coming back to Duolingo and learning every single day.“
Dr. Bozena Pajak, VP Learning at Duolingo
These are powerful words that I can only confirm from my own experience. My own Duolingo streak is currently at 385 days, which means I have been studying Spanish regularly for over a year and have learned over 800 words in that time. I can already read and write simple texts.
What I haven't been able to do yet is to actively use my language skills when speaking. It's quite frustrating when I stutter when ordering in one of my favourite restaurants in beautiful Mallorca. So the famous leap from passive to active vocabulary will be made through video chats with Lily? I'm really excited to see how this will work for me personally and for the Duolingo share price.
What's the catch?
The Duolingo stock is a prime example of the "Eyes and Ears Investing" approach propagated by Peter Lynch. As a shareholder, you not only have the opportunity to analyze key figures and read analysts' reports, but you can also test the products and get an idea of the real added value and further development. For me as a shareholder, this is an invaluable advantage.
What's the catch?
The Duolingo stock valuation is a bit ambitious. The EV/sales ratio is 15 (based on 2024 sales), which means that the company is being paid 50 times current free cash flow. I don't think the P/E of 200 is relevant (yet), given the big earnings leaps from a still low base.
Despite this premium price, I stand by the assessment I already made in my last Duolingo review at the end of 2023:
"Considering the strong growth momentum and the high operating leverage, I cannot see any extreme overvaluation in the current prices that would call for profit-taking.
I will continue to hold my position, which has become quite large in the meantime. Because Duolingo has what it takes to grow into this valuation and well beyond over the next couple of years."
For anyone who doubts my words, I recommend a recent interview with co-founder and CEO Luis von Ahn in Forbes Magazine. Luis came from a humble background in Guatemala and has become a true self-made billionaire through his involvement with Duolingo. His goal is to use AI to turn the popular language app into a language teacher for everyone.
“It may put one-on-one human tutors out of business. I understand that. But I think net-net it is better if everybody has access to one.”
Luis von Ahn, CEO Duolingo
Conclusion on Duolingo stock
It is becoming increasingly clear that Duolingo will not be left behind in the age of AI. On the contrary: AI is the catalyst for Duolingo's next phase of growth. I have every confidence in the great management team around Luis von Ahn and his CFO.
If you would like to continue observing Duolingo with me in the future, you can
*Disclaimer: The author and/or associated persons or companies own shares in Duolingo. This article is an expression of opinion and does not constitute investment advice.