Duolingo (NASDAQ:DUOL) is a mobile language learning firm in the consumer discretionary sector. This year, the company's shares have plummeted, leading to significant underperformance compared to both its sector and the market. They are down 29%, not including the results of trading after the release. The Consumer Discretionary Select Sector SPDR Fund (NYSEARCA:XLY) is down about 5%.
However, the tide might be turning for Duolingo. The company reported Q2 2024 financial results on Aug 7, 2024. Shares rose over 5% in after-hours trading, as the market clearly liked the results. So, what caused shares to rise so significantly, and what are the most important factors to pay attention to around the future of Duolingo? Before we answer those questions, let’s get a better understanding of the firm’s operations by looking into its annual report.
Duolingo: A Leader in Mobile Language Learning
Duolingo operates a mobile app that helps people learn foreign languages. In the minds of many, Duolingo has become synonymous with the idea of learning a new language. In its annual report, the firm highlights that the term "Duolingo" is Googled 18 times more than the term "learn Spanish."
Duolingo operates as one reportable segment but divides its business into revenue types. The revenue types are subscription, advertising, Duolingo English Test, In-App purchases and Other. Subscription is by far the largest revenue generator, accounting for 76% of total revenue in 2023. Advertising, Duolingo English Test, and In-App purchases each made up between 9% and 6% of total revenue.
Users can access Duolingo's app for free, and it contains all its course content. Users pay subscription fees for premium features on the app with the Duolingo Super and Duolingo Max tiers. They cost $12.99 a month and $29.99 a month, respectively.
The Duolingo English Test is an online English proficiency exam. It's used in high-stakes decision-making, such as university admissions. It is AI-driven, getting easier or more difficult based on the test taker’s performance. Over 4,000 higher education institutions, including Yale and MIT, accept the results of the test as proof of English proficiency. The cost of the test is $59.
Duolingo generates revenue through its “freemium” business model. The model has several important attributes. Because the product is free and provides value, it will attract a lot of users; Duolingo had over 100 million monthly active users (MAUs) in Q2 2024.
The firm can advertise to these free users to generate revenue. A percentage of free users will make in-app purchases or upgrade to a subscription for premium features. The freemium business model allows the product to become widely known and then generates the majority of revenue from a sliver of the users. For example, only 7.7% of Duolingo’s MAUs were paid subscribers as of Q2 2024.
Duolingo Beats on Adjusted EPS and Revenue with Superb Growth
Duolingo impressed on adjusted earnings per share compared to analyst estimates. The number came in at $0.51, representing an earnings surprise of 59% and an increase of 537% from the previous year.
Revenue was higher than expected as well, but it was not nearly as big a surprise. It came in at $178.3 million, $1.2 million above expectations and an increase of 41%.
The company also slightly raised its full-year midpoint revenue guidance to $735 million, an increase of less than 1% from the amount previously expected. Duolingo shined on its key metrics, with MUA’s up 40%, daily active users (DAUs) up 59%, and paid subscribers up 52%.
Duolingo Has Lots of Room To Grow and Wall Street is Bullish
The current size of the English language learning market worldwide is $38 billion. Duolingo’s projected revenue in 2024 accounts for about 1% of that. Analysts expect the market to grow 11% annually through 2031. That doesn’t include the size of the market for other languages, and Duolingo offers courses in 42 languages. Based on this, the firm still has tons of room to grow.
Duolingo’s prospects are highly dependent on growth in its users count and increasing user engagement. It is doing well on both fronts. Over the past year, the company increased the percentage of monthly active users that were also daily active users by 4%. This is important because daily active users should be more likely to become subscribers rather than just monthly users.
Wall Street analysts are bullish on Duolingo’s potential. Only one analyst has a sell rating on the firm, while 12 have either a buy or a strong buy rating. Four analysts rate it a hold. The company has an average 12-month price target of $250, representing an upside of 55%.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
