Is Duolingo Stock a Buy Now?
One look at Duolingo's (NASDAQ: DUOL) valuation would send any self-respecting value investor running for the exits. The language-learning specialist's shares trade at nosebleed-inducing ratios such as 18 times sales, 64 times free cash flow, and (keep the smelling salts handy!) 692 times earnings.
Yet, I see a great investment in Duolingo. Those scary valuation ratios are not necessarily deal-breakers, if you're willing to analyze the company's growth prospects on a deeper level.
What makes Duolingo so special?
Duolingo works toward a simple yet ambitious goal. "Our mission is to develop the best education in the world and make it universally available," the company says in every earnings report.
Mind you, the mission statement says nothing about "language learning." That's just where CEO and co-founder Luis von Ahn decided to start Duolingo's journey, since it seemed a relatively easy market to tackle with a robust global target market. The company has already added math and music courses on some platforms, and these alternative subjects are off to a stronger start than the first few language classes.
"The results that we have so far, we're very happy with, and they are much better than the results we had after we launched language learning," von Ahn said in February's fourth-quarter earnings call. "So if you rewind to 10 years ago and you look at language learning, these courses are just way ahead. So we're very happy with that."
And even though the music and math classes started just one quarter ago, and only on the iOS version of Duolingo for iPhone and iPad users, von Ahn noted that his company has already become a leading provider of online instruction in these subjects.
That was fast.
This sudden success shines a spotlight on Duolingo's user-friendly learning experience, using a family friendly set of cartoon characters and a learning process steeped in voluntary gamification. You can take the service very seriously and focus on reaching fluency in Spanish, Japanese, or Esperanto -- or you can treat it more like a game by collecting experience points and "gems" while climbing the league system. There's a motivational angle in there for everyone.
The company isn't developing any more non-language subjects at the moment, aiming to learn its own lessons from the music and math experiment before going any further. But in the long run, you should expect the Duolingo system to extend into other fields where limited instruction and a heavy dose of repetition can get the job done. I'm thinking about topics like history, physics, and chemistry at first. Subjects where human analysis and intuition play a large role will probably have to wait until the company develops specialized training platforms for them. I'm looking at you, psychology and pre-law.
88.4 million monthly users
Duolingo has amassed 88.4 million monthly active users so far, including 6.6 million paid subscribers. The rest are using the freemium service, with ads popping up after every lesson and the option to pay on the go for certain features.
The monthly user count rose by 46% year over year. Revenues jumped 44% higher, landing at $151 million. Free cash flow more than tripled from $11.1 million to $47.7 million.
That's a cash-based profit margin of 32%, up from 11% in the year-ago period. That's comparable to mighty cash machine Apple (NASDAQ: AAPL), whose free cash flow margin worked out to 31% in the holiday quarter of 2023. In other words, Duolingo is making a lot of money.
Is Duolingo stock really worth 18 times sales?
It's fair to say that the stock still looks pricey in relation to its rich cash flows. But the thing is, those cash profits should scale up quickly as Duolingo builds a larger customer base.
88 million monthly active users is nothing to sneeze at, but the potential market for a "universally available" online learning platform could eventually soar into billions of students. Duolingo is barely scratching the surface of the language-learning opportunity, and the addressable market multiplies many times over when you add other subjects.
Now, Duolingo will never be the One School to Rule Them All. It's simply approaching an epic long-term business opportunity with skyrocketing speed. The road ahead won't be easy -- extreme growth becomes harder and harder over time and unexpected challenges can always pop up along the way -- but the company is off to a great start with a robust growth plan on the table.
This stock has earned its lofty valuation ratios the hard way, and I fully expect Duolingo to bankroll its soaring stock price with years of high-octane growth. Your mileage may vary but that's why I still recommend buying Duolingo stock, even at this seemingly overpriced level.
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Anders Bylund has positions in Duolingo. The Motley Fool has positions in and recommends Apple and Duolingo. The Motley Fool has a disclosure policy.
Is Duolingo Stock a Buy Now? was originally published by The Motley Fool
