Discover more from Hourglass Investing
Deep Dive - Duolingo
The Language Learning Powerhouse Changing the Model Through Gamification
Hola, chicos, y bienvenidos. Hoy tenemos un nuevo artículo de un negocio muy emocionante.
Not bad, eh? I hope not anyways. To my Spanish readers, please feel free to rip me apart.
In English, hello and welcome. Today, we have a new article on a very exciting business. In fact, that business helped me along the way to being able to write the above sentence in Spanish.
Language learning is an incredibly complex, time-consuming, and mind boggling endeavour. It is also immensely rewarding and provides a lot of value for those who stick with it - learning a new language can help you travel, move, and immerse yourself in cultures in a way that is simply not possible without speaking the local language. It’s for that reason that so many people want to do it.
Unfortunately, there’s never really been a great way to do it - learning a language often feels more chore-like than anything else. And it’s for that reason that so many people don’t want to do it, or don’t stick with it very long. So it’s a good thing that a professor and his graduate student seemingly stumbled upon the idea for an incredibly fun, strangely addicting, and undoubtedly effective platform for learning languages back in 2011. That platform needs no introduction; it’s the most downloaded educational app in the world, offering over 100 courses in more than 40 languages, and frequently takes social media by storm with a recognizable and iconic form of marketing in the shape of a tiny green owl. If none of those hints are giving it away, I’m talking about Duolingo (Ticker: DUOL).
**Disclaimer - I am not a financial advisor or anything else related to finance besides a nerd. This article is meant for entertainment and a basis for further research - please do not make any financial decisions based solely on this article. I’m also a shareholder in Duolingo and may be biased towards it future successes.**
At Time of Writing:
Market Cap: ~$6bn
Gross Margins: 73%
"If you talk to a man in a language he understands, that goes to his head. If you talk to him in his own language, that goes to his heart."
- Nelson Mandela
Duolingo was founded in 2011 by Luis von Ahn and Severin Hacker, Luis’ graduate student at Carnegie. von Ahn was already a successful entrepreneur, while Hacker brought a lot of computer science expertise of his own. Together, they set out to create a company that could empower people around the world through access to high-quality, free education.
Growing up in Guatemala, Luis von Ahn came to realize the profound impact that learning another language, particularly English, could have in a student’s life. He came to be a successful entrepreneur and a millionaire multiple times over, and decided that his next focus would be creating a business that helped to better the world, a mission that still drives Duolingo today.
The company has long-term ambitions to become a platform for all levels and types of learning, but decided to focus on language first. In addition to von Ahn’s own experience with the career prospects of his peers that learned English in Guatemala, they were eyeing a massive market with an estimated +2bn people around the world learning a new language - it was for this reason the team decided to target languages.
They began by training AI models to take web translations and turn it into fun, short lessons for English, Spanish, German, and French courses. Fun & short is the emphasis here, as Duolingo has always focused on gamifying their app - that is, trying to turn language learning, a chore on other language platforms, into a less task-like and more game-like setting that users can enjoy their time on while still achieving something productive. By the time they announced their gamified language platform was ready for public release in 2012, the app had a waiting list of 500K, demonstrating an eager market amongst the general public for a new language learning app.
After their initial release, it was off to the races for Duolingo. The next year, they became the first education app to be awarded the ‘App of the Year’ by Apple and had over 3 million registered accounts. This exceptional growth was not unfounded - a study on people using Duolingo found that users who completed a language course through Duolingo had equivalent proficiency levels to university students that had completed four semesters of study in a language - but at far less cost (and probably less stress). As the company expanded, Duolingo began to seriously invest in research and development, as well as on personnel, with a focus on marketing, outreach, engineering, business development, and learning scientist hires.
Duolingo has consistently grown since its founding, aided by a 2021 IPO on the NASDAQ under the ticker DUOL. Today, the company sports over 70m monthly active users, is the worlds #1 most-downloaded education app (which has allowed it to become seemingly synonymous with language learning), and only continues to expand its education offerings to realize its mission of democratizing education through accessibility and affordability.
At a market cap of ~$6bn, ($150 /share), Duolingo has returned a +6% gain since its 2021 IPO, though share prices are still depressed from the bubble high of ~$200 /share. Regardless of the share price, the company has not shown any signs of stopping its incredible growth, continuing to grow its revenues and userbase at impressive clips while expanding its products, usability, and the business model.
Duolingo operates under a freemium model - while any user can sign up and begin using the product for free, the experience is much more enjoyable and the learning process more seamless if they sign up for the premium service, Super Duolingo. The paid version allows users to;
Utilize the app without advertisements
Make unlimited mistakes
Access personalized mistake review and the Practice Hub
The free version, by contrast, has advertisements after most lessons and does not allow users to review mistakes, while also setting a limit on the number of mistakes they can make in a day (these are called hearts - users get 5 hearts/mistakes everyday). With any freemium model, there is a fine line that the company has to balance to ensure their free model funnels users into the premium service rather than push them away; in the case of Duolingo, I think they have successfully balanced a push for revenues without alienating users. This may be partly attributable to the fact that Duolingo’s primary mission to make education accessible remains at the core of the company - despite now taking profits as a publicly traded company, their focus on accessible education allows them to ride the fine line of the freemium model.
Anecdotally, I can say that I was not discouraged from continuing to use the platform as a result of the restrictions on the free service - it is still very much a usable product to learn on, and I was getting enough satisfaction out of it that I decided to go to the subscription service. It was worth it for me - I was able to use Duolingo significantly more as a result of the upgrade to unlimited mistakes (I make a lot of them).
My impression is that, if a user is serious about learning a language, for example if they are moving to a country with a language other than their own, then it would be worth every penny to use the unlimited service.
Duolingo’s success is driven by the flywheel at the heart of their business model - as more users join the platform, Duolingo can leverage the data from their lessons to create better products, in turn increasing the usability and effectiveness of the learning to improve user satisfaction. More satisfied users are then more likely to spread the word about Duolingo (made even easier by features that allow easy cross-platform sharing of achievements and language progress), in turn attracting more customers and improving the company’s dataset. And so on and so forth. These kind of flywheel effects can have enormous impacts for businesses that are able to successfully leverage them - Duolingo seems to understand the funneling users in and retaining them is the foundation on which their flywheel is built.
Language Platform - Obviously, learning a language is Duolingo’s hallmark offering. They go beyond just language learning, however, by gamifying the learning experience to make it fun and, rather than a task to be dreaded, something to look forward to in their user’s day. They’ve added a number of features into their platform that help to achieve this goal;
Streaks - Users can build up a streak for the number of consecutive days they’ve achieved their learning goal. This incentivizes users to come back everyday, gives them something to show off, and drives long-term user retention - users often get attached to their streak freezes and are willing to go to great lengths to ensure they don’t lose them. In a recent interview, Luis von Ahn revealed there are more than 1m daily users who have a streak longer than 365 days - I think I’m probably safe in saying these people are very committed to the app.
Podcasts - Duolingo offers podcasts in several of their more popular languages so that users can take their learning on the go, practice their listening skills, and engage with their learning and the app while they go about their daily commutes or cleaning.
Social Aspect - Duolingo has a fairly robust social platform for what is primarily a language-learning app, but it is a huge driver of their ability to retain users. Customers can sync their contact lists to find friends on the platform, compete in leaderboards, share their progress, engage in learning ‘quests’ with their friends, and earn badges for reaching various milestones. All of these features help to incentivize users to continue using Duolingo products, as they are held accountable by their friends and a sense of competitive spirit. Easy sharing of achievements to other platforms also help to generate a sort of FOMO effect, as I view it, in which users see their friends achieving things and having fun on Duolingo and join the platform so they don’t miss out. While ‘FOMO’ may seem like a strange way of viewing this, its actually an effect that many social platforms seek to achieve to build their user bases.
All of these extra features are additive to the 100+ courses in over 40 languages that Duolingo offers, which includes High Valyrian (‘Game of Thrones’) and Klingon (‘Star Trek’). While this may seem like a silly endeavour for a company, it’s a stellar form of marketing that helps to grow the userbase with superfans and ultimately funnel new customers onto the platform, where they may find they turn to real languages if they’re impressed with the product (here is a testimonial from someone who did just this while learning Valyrian). High Valyrian was especially popular when ‘Game of Throne's’ was actually still a good show (yes, I’m still salty about season 8), and received another surge recently with the release of ‘House of the Dragon’.
While the most popular language course on Duolingo is English, most of their courses are offered for English speakers looking to learn another language, with Spanish being the most popular choice at a whopping 33m learners. Interestingly, Duolingo is also trying to preserve endangered languages, offering courses in Navajo, Hawaiian, and Gaelic - all languages that have had or still have dwindling numbers of native speakers. The president of Ireland publicly thanked Duolingo for the platform’s Irish language offering, which has ~1.5m learners helping to keep the Irish language alive through their daily practice - only 10K people are still native Irish speakers today.
Subscription - The bulk of Duolingo’s profits, ~70%, come from its subscription Super Duolingo service. Access to the premium service can be purchased on individual or family plans - the family plans are particularly popular, with many users choosing to get plans for the entire family so that parents and children alike can work on their language skills. Subscription revenues are driven by only 8% of the monthly active userbase, demonstrating both the immense value of the premium subscriptions for the business and the need to the business to continue funneling users into it. Super Duolingo costs $10/mnth or $120 annually, while the family plan is $12.50/mnth or $150 annually.
In March 2023, Duolingo introduced a new premium premium service (premium ^2?) called Duolingo Max - Duo Max was created in partnership with OpenAI, of ChatGPT fame, and allows access to two new and highly personalized features: Explain My Answer & Roleplay.
Explain My Answer allows users to enter into a chat with Duo on any question and have the reasoning behind it, whether they got the answer right or wrong, explained to them. This allows for a lot more insight into specific grammar rules and mistakes that users may often repeat without understanding why. Historically, fixing and providing feedback on user’s mistakes has been very difficult for Duolingo to incorporate effectively, but Explain My Answer allows them to finally check that box using generative AI. Check it out;
Roleplay is another AI-powered feature that allows users to have one-on-one conversations in their language of choice with Duolingo’s unique characters and receive feedback on their conversational skills. This feature was designed and rolled out to combat feedback from users that had completed entire courses, but still didn’t feel comfortable speaking the language. The reason behind this, and one of the biggest drawbacks to any language learning platform, is that one of the biggest barriers to learning a new language is the requirement to speak with native speakers to practice conversational abilities - there’s only so far you can go with learning a new language without this. Unfortunately, this is impossible for many people, as they either don’t know a native speaker in their language of choice or feel uncomfortable potentially making a fool of themselves trying to converse in a different language. This new rollout of Roleplay allows a happy medium, providing a safe and secure space for users to practice conversational skills and feel more comfortable speaking the language.
Both Roleplay and Explain My Answer seem to be extremely value-additive features for the platform - it will be interesting to monitor the success of the Duolingo Max service and see if it gains penetration amongst the userbase. If users feel there is enough extra value provided through these features to pay a little extra, this could provide a huge revenue boost for Duolingo in the subscription portion of the business. Having used Duolingo quite a bit myself, as well as engaged in several other forms of language learning, I believe both of these products, and the Roleplay in particular, will be huge successes for the business in terms of vastly improving their products and driving increased profit. The Duolingo Max plan is considerably more expensive than the Super Duolingo at $30/mnth, but offers a valuable discount for annual subscriptions at just $168 annually.
Advertising - Duolingo makes advertising revenues from those users that stick to the free model, but it generates only 10-15% of the company’s revenues and at much lower margins, so the focus for the business is clearly to drive users towards the subscription service. Advertisements, which are inserted after nearly every lesson or can be watched to increase the number of mistakes users can make in a day, allows Duolingo to generate some small revenues while sticking to their core mission of making their products free for those who cannot or don’t want to pay for the premium services.
English Test - Duolingo also generates another ~10% of their revenues from offering English tests that certify users for English proficiency. Demonstrating proficiency is a requirement for international students at almost every post-secondary institution in North America, as well as for incoming migrants looking to get a visa in the U.S. or Canada. Unfortunately, getting a certification in many places still requires a written exam with an invigilator in a physical testing center, and can be an exorbitantly expensive process - first, people have to pay to travel to the testing center, which is often in large urban cities and difficult to travel to for rural residents. Next, they have to pay $200 just to write the test (and hope they pass so they don’t have to repeat the whole process at a later date), and then are charged an additional $20 for every institution that the test results are sent to. This is a huge barrier to affordable migration.
Duolingo decided to offer their own English certification test that can be completed online and at a lower price ($50 & free results sent to 40 institutions vs. $200 + $20), allowing international students or hopeful migrants to lessen the financial stress and take the test from the comfort of their own home, and potentially on the same platform they’re already using to learn English. This is a great adjacent revenue-generator for Duolingo, and over 4000 post-secondary institutions now accept the Duolingo certified English proficiency, including ivy league schools like Yale, Stanford, MIT, Duke, and Columbia.
Digital Store - The rest of Duolingo’s revenues are made up by in-app purchases through the platform’s digital store for Duolingo currency, which then allows users to buy things like extra lives and streak freezes to ensure that users don’t lose their streak - this particular feature was a fantastic idea by Duolingo, as when users have extremely long streaks they are more than happy to pay a bit of money to keep it if they know they’re going away for a bit. Not only does this earn them a tiny bit of extra revenue, it ensures that users don’t feel imprisoned by the app (remember, the goal is still to make it fun!) and retains users who may have otherwise been discouraged by losing their streak.
Duolingo ABC & Math - More oriented towards kids, Duolingo’s latest efforts have seen them expand into other areas of the education sphere, reading and math. Duo ABC helps teach young children (preschool to second-grade levels) reading & writing skills. There are some amazing testimonials from parents who used Duo ABC as supplementary home learning for their kids, and found that not only did their kids love the stories and interactive learning style, but their skills improved dramatically as a result.
Duolingo Math is a newer addition to Duolingo’s completely learning package, and has options for both younger students - basic elementary-level math like multiplication, division, geometry, etc. - and adults looking to improve everyday math skills like percentages and conversions. Both Duolingo Math and ABC are completely free to use with no advertisements, so are not revenue generators for the company. While this may seem wasteful, from an investors perspective, to pour money into developing something that earns $0, it’s important to keep in mind that this is a mission-driven company that is committed to keeping their primarily-level learning features completely free - building out products like these ensures it retains that part of the company culture. Furthermore, developing a robust, all-around education platform helps to broaden brand recognition, a huge part of Duolingo’s success, and integrate it into kids learning processes early on. This is totally conjecture, but if kids have learned to read and do math on Duolingo, their parents may be more encouraged to get them onto the language-learning platform next, which may in turn encourage family plan subscriptions.
Duolingo for Schools - Duolingo offers a management layer designed for teachers on top of the base Duolingo platform, allowing Duolingo to be used in classroom settings. Students download and utilize the app, while teachers are able to easily find curriculum-based modules, hand out assignments/homework that are tailored to each student’s pace and proficiency level, and gain insights into the learning needs, time spent learning, and accuracy for each of their students. This, too, is 100% free.
Apart from the Duolingo for Schools, ABC, and math features, Duolingo’s primary customers are those seeking to learn new languages - those who pay for the subscription services are often learning a language for a particular reason, and not just for fun. There are a variety of reasons that subscription-service users may need/want to learn a language;
Moving to another country
Vacations or long-term travel
People looking to advance career prospects - studies suggest job seekers with advanced English skills may earn up to 30-50% more than workers with less proficiency in English
Regardless of why they’re trying to learn a language, it can’t be doubted that a lot of them are on Duolingo; there are more people learning a language on Duolingo in the U.S. than all the high-school students learning languages across the U.S. combined.
The English Proficiency Test has also broadened Duolingo’s customer base to include international students looking to go to Canada or the United States for post-secondary education and requiring an English certification, and potential migrants trying to obtain a visa.
Duolingo has engaged in a lot of different partnerships, some more professional/corporate in nature, others more for branding and marketing potential.
Duo has partnered with various government agencies and businesses to provide language-learning customized to the particular need of that organization, such as the Peace Corp building out a Syrian refugee resettlement program in the U.S.
Their partnership with HBO to deliver the above-mentioned High Valyrian course is an example of a marketing-oriented partnership, which paid dividends for the company with approximately 3m users joining/using Duolingo to take High Valyrian lessons.
Another interesting partnership that Duolingo pursued was with Tinder, which offered users 30 days of free premium Duolingo after discovering that users of their passport feature were often matching with people that spoke another language.
There are all sorts of unique situations that learning a new language is immensely helpful for, which makes the potential for future brand-building and revenue-driving partnerships for Duolingo quite expansive. They have shown a lot of business savvy in the partnerships they’ve made to date, which have helped to either drive future profits or expand the scope of their brand.
Duolingo has kept an impressive amount of their development in-house. However, in October of 2022, they decided to acquire Gunner, an animation studio that has made digital art for Spotify & Google. Duolingo acquired the animation studio and their team of artists to help with the design, aesthetic, and motion graphics within the platform, helping to make the learning process more fun and personable.
They have also began hiring on personnel to help with mergers & acquisitions, with the plan to start building out this side of their growth capacity. The company is not likely to look at acquiring any direct competitors - von Ahn has repeatedly mentioned he isn’t very fussed about other language-learning platforms or any threat they may represent. Look instead for their future acquisitions to be similar to Gunner, which will help to improve Duolingo’s products and gamified value proposition, or to help Duolingo build out platforms for other areas of education.
I’ve already littered this article with anecdotal evidence, mostly because so many of my friends and peers use it for a variety of reasons, so I’ll keep this section brief. There were just a few extra stories I wanted to throw in that I think speak to the effectiveness of the products, business model, or use cases for Duolingo;
The family plan helps to evidence both the effectiveness of the social platform and a use case for the app; one family I know took advantage of the family plan so that all their family members could use Duolingo prior to a family vacation overseas - the app helped them to familiarize themselves with the language before they left (reporting that they felt much more comfortable ordering food and dealing with taxis, museums, and the like once they got there), while the challenges, quests, and XP helped them to push each other to really make the most of the app - they had a (mostly) friendly rivalry that allowed the XP leader for that week to pick the film for family movie night. After the vacation was done, they continued to pay for and use the platform because they had so much fun with it.
Streaks are a seriously addictive and incentivizing part of the app. No joke, I once saw someone pause a game of beer pong and start doing a Duolingo lesson, in the middle of a party no less, because they had just received a notification their streak was about to be broken. They sat in the corner for the next 10-minutes and didn’t interact with a soul until they had completed their lesson. It was awesome, and I thought I’d be remiss not to include this story.
Learning a language and Duolingo are seemingly connected at the hip in the broader public’s subconscious. Though there are other language-learning platforms out there, Duolingo’s brand is powerful; whenever I tell people I’m learning a new language, they immediately ask what my Duolingo streak is, before I’ve even told them I use Duolingo.
For a young company focused on growth, there’s a lot to like about Duolingo’s balance sheet. Duolingo has a fairly attractive business model that is highly successful at growing its user base, and a lot of this shows up when looking at Duolingo’s key metrics and performance indicators. I’ll dive first into what is less attractive about the balance sheet, and then talk about a lot of the good things.
Balance Sheet - The Bad & The Ugly
The capital efficiency metrics don’t look good without context, but as I’ve mentioned in previous articles, this is not a very accurate metric to monitor for a company that’s putting most of its profits into expanding the business. It simply hasn’t got to a point in the business lifecycle where it can invest smaller portions to see significant returns, or is seeing significant returns off initial investments, so I’m going to ignore the ROIC, ROE, and ROA.
Stock-based Compensation (SBC) - Go figure. A young tech company trying its best to retain talent, in an industry with a competitive labour environment no less, is paying a significant amount for stock-based compensation. That said, it is a bit of a blow to see a 171% CAGR in SBC since 2021, but this is simply a cost of doing business for Duolingo. This has led to a slight decline in revenue on a per-share basis from 2021 → 2022, so this is something to monitor to ensure it doesn’t get uncontrollably dilutive for shareholders.
Widening Losses - The company is undergoing widening losses on nearly all true profitability fronts, including EPS, net income, operating income, EBIT, & EBITDA. This, too, comes down to the significant reinvestment that the company is putting into expanding its top-line metrics and userbase, and that they simply aren’t focused on profitability at this point in time. If you look into the company any further, you may notice growth in the EBITDA figures and wonder why I’m lying to you - the company focuses on non-GAAP, or adjusted EBITDA figures in their annual & quarterly reports. On this front, they have seen growth - here are the factors that Duolingo is adding & subtracting to arrive at their adjusted figures;
Customer Concentration - As mentioned above, the lions share of Duolingo’s profits come from just 8% of its active monthly userbase, delivering a pretty narrow concentration in profits to a very small number of their total customers. This puts the company in a pretty fragile position - if Duolingo were to make any decisions or moves that upset that group of users, they could have a pretty significant downturn in revenues, thereby reducing shareholder value and analyst estimates for the business.
Balance Sheet - The Good
Revenue Growth - Duolingo has sustained some pretty impressive revenue growth over the last several years, with a 51% CAGR since 2019. They don’t show any signs of stopping soon, with a 42% YoY growth reported in Q1 of 2023. This is especially impressive considering this is being achieved in a tough macro-economic environment that hasn’t treated other discretionary-spend companies very well.
Rising ROIC and ROA - Despite saying I’d ignore these metrics, I will cherrypick a bit and say that, though negative, Duolingo’s capital efficiency metrics have been rising steadily since going public, suggesting the investments they’ve previously made have started to generate returns that are outweighing the reinvestments back into newer expansions on the business.
Percentage of Revenues used for R&D + S&M - This is perhaps one of the best indicators of the Duolingo’s brand and potential for future success. Though total costs have, of course, increased as Duolingo expands, the percentage of the company’s revenues being allocated towards sales and marketing has decreased while still growing the company’s userbase by 62% YoY as of Q1 2023. This suggests that the company’s flywheel is in full effect, and the quality of their products is allowing them to grow their customer count without spending for that growth.
Meanwhile, a greater percentage of their revenue is being allocated towards research & development, which is an encouraging sign that shows the company is not slowing down or getting complacent - Duolingo is continuing to build on its products and continuously enhance them to ensure the best product available and increased usability, which will in turn help their flywheel to further grow the customer base while decreasing marketing spend.
Improving Margins - Though marginal, Duolingo’s gross profit margin has been slightly but steadily increasing since going public, while operating income margin (though still negative) has been trending positively.
FCF Positive - A powerful demonstration of Duolingo’s ability to start focusing on profitability should they choose to, Duolingo is free cash flow positive and generated more than $46m in free cash flow in 2022. They have a strong cash position, too, reporting $641m in cash reserves at the end of their most recent quarter. This gives them a lot of ammunition for acquisitions, should they continue to seek growth through that avenue, or to cover debt if required.
Debt - Duolingo has an extremely low debt/equity ratio, with cash reserves that far outweigh their $225m in liabilities. This demonstrates some fiscal responsibility and a security blanket for investors concerned with potential liquidity issues.
Diverse Customer Base - Duolingo’s revenues are spread out nicely across the world - with an approximately half-and-half split between the United States and the rest of the world. This goes back to their customer base being users all over the world that need to learn languages, as well as the international customers looking to take the English certification test. I view geographic diversification as a strong point because it ensures the company isn’t too reliant on one country or region to continue making money.
Key Performance Indicators (KPIs)
As with any investment, especially with growth companies where your money is tied up in a riskier asset, whose growth is unassured, it’s important to monitor the vital signs that the company is going to continue performing to your expectations. Duolingo has a number of key performance indicators that will help to keep track of how the company is growing;
Daily Active Users (DAU) & Monthly Active Users (MAU) - DAU & MAU helps to get a sense of how many users are actively returning to and using the platform, either on a daily basis (these are the super customers for Duolingo) or at the least on a monthly basis. For an educational app, retention of its user base is key and helps to show whether Duolingo’s gamification strategy is working well enough to keep users coming back. In Q1 ‘23, Duolingo reported 20.3m DAUs and a 62% YoY growth in its daily active user count, and 72.6m MAUs with a 43% YoY growth, showing that, at least for now, Duolingo has been successful in growing its core userbase and retaining regular users.
Bookings - Bookings help to monitor the future revenue potential for Duolingo - if customers sign up for an annual plan or book an English test, some portion of those bookings will not be recognized in a single quarter. The bookings metric shows future revenues that are contracted but not yet realized on the balance sheet. Not only does this help gain some insight into what future quarter’s revenues may look like, but it also grants a peek into the health of the subscription service - Duolingo reports both subscription bookings and total bookings, so track these if you’re following the company. The company reported $110m in subscription bookings and $140m in total bookings in Q1.
Paid Subscribers - Duolingo earns most of its profits from a small number of subscribers to its premium service. Given how much more profitable these customers are compared to free users, I believe the most important metric to follow for Duolingo is the total number of paid subscribers and the percentage of users out of the total monthly active userbase that choose to pay. Duolingo reported 4.8m paid subscribers in Q1, good for 8% of its total monthly active userbase;
Duolingo has driven some impressive growth in this area, which explains why their revenues have been able to grow at such a speedy clip; the company has grown its paid users at 167% over the last two years, while the percentage of paying users has grown by 320 bps over that same period. I only expect this to continue, and perhaps at an even greater pace as a result of the GPT-powered features that Duolingo has rolled out. If I am correct about a greater number of users paying for those features, then Duolingo will recognize greater revenues from these customers as well, given the higher cost of the Duolingo Max plan.
Defense & Offense
Duolingo demonstrates a moat through their brand recognition, leadership in the language-learning space, and a network effect that also serves to help grow the business. The company also has several potential growth avenues they can pursue to expand their market and revenues, including expanding to provide apps for other forms of learning.
Leadership & Brand - Defense
Duolingo has done a truly stellar job of marketing themselves. While there are other language-learning platforms out there, none of them have made themselves synonymous with learning a new language the way Duolingo has. They have carved out a clear space for themselves as a leader in this industry, pushing out players that have been doing it longer to become the world’s most downloaded education app. The company has a unique form of marketing through the charismatic green owl logo, and they continue to build on this branding through shrewd social media and marketing campaigns.
The brand that Duolingo has created for themselves to date has allowed them to dominate their space and continue growing the userbase while spending less on marketing - a clear sign, to me, that their efforts are starting to pay off, and that they have a leadership position and real estate in the general public’s subconscious that will serve as a strong defense against other language learning companies. As they expand their other education services, their brand will only increase - I will not be surprised if it gets to a point (if we’re not already there) where people looking to learn a new language thoughtlessly download Duolingo without checking their competitor’s options as a direct result of their branding and leadership.
Network Effect - Defense & Offense
This spins back to the effectiveness of Duolingo’s flywheel - as more people learn on the app, Duolingo can utilize user data to create more effective lessons and improve their products through AI and A/B testing. As their products continuously improve, their userbase will grow and the inherent value of their products will grow with each new user; this is the definition of a network effect. Continuing to roll out new products, as they have with Roleplay and Explain My Answer, will also help them with growth and retention. This network effect will be a major growth lever for Duolingo moving forward, and will also help in making their platform harder to disrupt for new or existing players looking to create a better product.
Education Market Expansion - Offense
Duolingo ABC and Duolingo Math are both free products designed to funnel more users into the larger customer base. While they don’t drive increased revenues directly, it shows the company is looking to expand into adjacent education markets beyond languages, which will only help to expand the size of their total addressable market. Luis von Ahn recently announced that Duolingo will be releasing an app for music learning as well - details are still murky and it’s unclear whether this will run on a freemium model as well. If it does, this could be a huge tailwind for Duolingo - the online music education industry is expected to grow at a nearly 20% CAGR over the coming decade to reach a size of approximately $1bn by 2030.
Duolingo’s ability and willingness to take what they’ve learned and apply it to other forms of education is a huge leg-up over competitors that may be focused exclusively on languages, and should greatly increase their revenues and market size if they continue to expand into different learning spheres.
Keep on Keeping on - Offense
Duolingo seems to have a real knack for finding new ways to grow their business; between partnerships, corporate & government subscription plans, marketing through fictional languages, and more recently through acquisition, they have found unique ways to continuously expand their reach and grow the userbase for their products. Continuing as they have to build partnerships and funnel users onto the platform will be crucial to growing the business, and their more recent focus on implementing an acquisition strategy could be huge for Duolingo as well. A partnership with enterprises to provide business- or industry-specific learning packages is one potential use-case I could see being a huge potential growth avenue for Duolingo.
Duolingo for Schools - Offense (Maybe)
I’m totally guessing here, and it’s not part of my investment thesis in the company at all, but if Duolingo builds out its Duolingo for Schools language platform to also include primary-level reading, writing, math, and other new spheres of education, they may be incorporated more and more into school systems. If this is the case, and Duolingo is able to become an integral part of the education system, it may be a platform that governments/school boards are willing to pay for Duolingo to widely implement, which would of course be a huge boost for the business.
However, the company has made no announcement to this effect, and have reiterated time and time again that they intend to keep this service entirely free - I don’t expect this to change anytime soon, if at all. Still, a guy can dream - the initial release of Duolingo didn’t recognize any revenues at first, but were able to pull the freemium lever after building up a userbase. Maybe, just maybe, that is a long-term potential for Duolingo, but I’m not necessarily banking on it.
A more realistic avenue that Duolingo could follow, which I think they could charge for while still staying true to the company mission, is to expand into post-secondary environments (which are more profit-driven than public schools) with a teaching/learning platform designed for classroom use. Given that they have developed a relationship with many schools already to ensure that the Duolingo English test is widely accepted in post-secondary institutions, this could simply be an extension of an existing relationship.
The market for learning languages is huge, part of the initial reason founders von Ahn and Hacker chose to target a language-learning platform first; over 2 billion people are estimated to be learning another language, and it’s not just the number of people learning languages that makes it an attractive market - there’s a lot of money being spent, too. An estimated $60bn is spent for both online and offline language learning across the globe, and as the world is increasingly downloaded onto the internet, and access to internet becomes more widely available, learners and spending will move online as well.
Global migration is a huge tailwind for this industry as well. People are increasingly more mobile, demonstrated by a near constant uptick in the number of international migrants around the world;
This trend doesn’t show any signs of stopping either, with a recent report from the World Bank Group suggesting that the number of migrants fleeing environmental or climate disasters, including drought, desertification, wildfires, and flooding, is only bound to grow as global warming continues to makes itself heard around the world. Regardless of why migrants are moving, many of them will find themselves in areas that do not speak their native language, and needing to learn a new dialect in order to integrate themselves in their new home.
Between an accelerated shift to online learning and tailwinds from migration, Duolingo stands to benefit immensely in a market that’s already worth $60bn and expected to grow at a CAGR between 10-20%. Duolingo’s most recent annual revenues of $370m show they have only just started to tap their potential in the market - but they’re not the only ones trying to take advantage of this opportunity.
While language learning is a fairly fragmented space, especially when considering the online/offline split in learners, Duolingo is a clear leader in the online space. They have built up a competitive advantage through their gamification strategy, the social aspects they’ve incorporated into their platform, and network effects from a data advantage that is fueled by +900m exercises completed by users everyday. This has all resulted in Duolingo eating up market share in the fragmented industry;
But that doesn’t mean they’re alone in the space, or that they can’t be interrupted. I’ll get into the four largest competitors and the difference in their language learning platforms.
Mondly’s main claim to fame is VR & AR apps that put you into real-feeling situations in which users can interact with their environment and roleplay different scenarios in the language of their choice. While Duolingo previously had nothing to compete with that product, the rollout of Duolingo Max and accompanying Roleplay feature helps to satisfy that shortcoming.
Other than that, they are very similar in pricing, a gamified model, and quick, light lessons that users can look forward to doing in ~40 languages. Some reviews mentioned that Mondly is also better than Duolingo for practicing conversational language.
Babbel is focused on replicating a classroom-like structure to their language learning platform. I don’t see why anyone would want to relive the days of primary-level language classes, but hey, I’m not here to judge.
As a result, they place more emphasis on grammar, conjugation, and verbal practice than Duolingo does. Their lessons are longer, they do not follow the gamification model for learning, and they only offer paid plans - unlike Duolingo, they do not offer a free plan, but for the paid services the prices are roughly the same.
One edge Babbel seems to have over Duolingo is, similar to Mondly, better teaching for useful, conversational language.
Busuu, according to reviews from users, is the better app for serious learners looking to become fluent in a language. They offer feedback (not immediate) on written and verbal exercises from actual native speakers of the language of choice, and have more comprehensive grammar lessons with an emphasis on conversational skills.
Beyond this, Busuu’s lessons are similar in length but do not have the same gamified feel that Duolingo’s do, nor any of the social aspects. Pricing is relatively equivalent to Duolingo as well, but they offer only 13 languages compared to the more than 40 languages that Duolingo offers.
I won’t lie, I was having a bit of a hard time getting a read on HelloTalk. Some people seemed to vehemently hate it, others said to ditch Duolingo because nothing would ever beat HelloTalk.
HelloTalk’s value proposition is connecting native speakers with users trying to learn the corresponding language. They provide voice, video, and text chatting options, with accompanying translation services. The program seems to be entirely free, but does not offer direct lessons of any sort. I don’t really view this company as being a direct competitor to Duolingo, and it seems to me like an app that would work well in conjunction with the use of Duolingo or one of the other language-learning apps discussed above.
Overall, there are things that each of these apps (minus HelloTalk) seems to be doing better than Duolingo - when it comes to natural, conversational learning, nearly all the other apps beat out Duolingo from the reviews I read. However, this is where I think Duolingo’s resources as a larger, publicly-traded company comes in handy - their recent rollout of Duolingo Max will, I believe, allay many of the concerns on Duolingo’s lack of a conversational teaching tool.
In fact, I think the huge amount of cash they have on hand and the impressive team of engineers and learning scientists they have built allow them to pretty much do whatever individual things any of these apps are doing better than them, and incorporate it into their own platform. For example, if Duolingo wanted to create a VR app to accompany their Roleplay feature, they have the cash reserves to make this possible - and just like that, Mondly has been pushed pretty much entirely out of the picture.
I am certainly biased towards Duolingo here, but I don’t see any of their competitors as offering a strong enough differentiator to encourage a large-scale exodus from the platform or the loss of a significant number of new customers. Mondly, Busuu, and Babbel simply don’t have Duolingo’s brand, resources, marketing capabilities, or data advantage at this point.
Wowza - I think one of the greatest selling points for an investment in Duolingo is the fantastic culture and team they have built. A mission-driven, founder-led business with a diverse, talented, and metric-focused team that is constantly innovating to improve their products is not an easy thing to build, especially as a public company, but Duolingo has clearly managed it.
A quick peek at Glassdoor proves it, with 4.4 stars on the company as a whole and a whopping 92% approval rating on CEO Luis von Ahn. Even the con mentioned in the above photo could be viewed as a good thing - while I’m sure a fast-paced environment may not be super fun for certain employees, as an investor I view this as a positive sign that the company is constantly pushing to innovate and roll-out new features and improvements on their products.
These are exactly the kinds of things I want to be seeing as an investor looking into the more qualitative aspects of a business, and it only gets better as you dive into the founders and company culture.
Luis von Ahn - CEO
Simply put, Luis von Ahn is one of those generational talents. He grew up in Guatemala and was scouted out by a Duke University employee that was travelling looking for academic talent abroad - she spotted Luis and, according to him, basically filled out the application to get him to Duke. Despite being a relatively unknown quantity, von Ahn graduated. At the top of his class. At Duke. Which is absurdly impressive.
He then went on to pursue a PhD in computer science at Carnegie, where he again excelled, helping to pioneer CAPTCHA to differentiate human vs. bot usage on websites (yes, that one, which we all use every time we sign up for something), and the field of human computation, a term that he came up with to describe the combination of computers and human computers (brains) to solve problems neither could do alone - this was the basis of his PhD. He joined Carnegie as a faculty member a year after the completion of his PhD, where he met soon-to-be co-founder Severin Hacker, his graduate student.
He started his entrepreneurial journey during his time at Carnegie by creating REcaptcha, which built on his initial work with CAPTCHA and was later sold to Google for a sum north of $10m. He was determined that his next project would be something that helped to advance society and make the world a better place - that next project was the foundation for founding Duolingo with Severin Hacker.
von Ahn is also a MacArthur Fellow, meaning he was awarded the prestigious MacArthur Fellowship Grant, also known as the Genius Grant. This grant is not something you can apply for - some team, somewhere, is responsible for identifying geniuses who are changing the world and call them to announce they’re going to receive a boatload of money to do with as they please (I’m expecting my call any day now).
Despite all these achievements, von Ahn is only 44 years old and has no future projects in sight - he’s on record stating that growing and expanding Duolingo is his sole mission.
Severin Hacker - CTO
Hacker grew up in Switzerland and studied computer science at Carnegie, where he met and studied under Luis von Ahn as his grad student. It was Hacker who initially started training the AI, and who drove the retention philosophy that remains at the heart of Duolingo - this idea fuels the metric-based teams at the company that are focused on constantly ensuring users remain active on the platform, as well as the gamification model, which was also Hacker’s idea. He, like von Ahn, is a believer in the empowerment to be gained from education, and that it should be made accessible to the most disadvantaged people across the globe.
Hacker and von Ahn both noticed the stress and unhappiness in the post-secondary environment at Carnegie, and committed to creating a happy work environment from the get-go. Much of this, they believed, came from being mission-driven and open with communication. Based on the Glassdoor ratings, I’d say they were both successful with this mission.
The culture at Duolingo is something else. Everything I’ve read about it, including this testimonial, suggests that it is a great work environment that prioritizes employees. There is also a great story from CEO Luis von Ahn who describes one of the more subtle interviewing steps he takes when hiring team members - he sends a driver to come pick them up from wherever they are, and then pays the driver for their opinion on the candidate and how the driver was treated by them; according to von Ahn, he has turned down hiring several very qualified candidates based on the fact that they treated the driver like crap. I think that says a lot about the type of people they are looking to add to their team, rather than just the type of employee.
As mentioned above, both founders prioritized a focus on a happy work environment based on their negative experience with the stressful Carnegie environment - as a result, they’ve worked to build what they, and many of their employees, describe as a fair and equal company culture that is entirely centered around their purpose.
Their commitment to this is demonstrated in their employee mix - as a tech company, it is obviously centered on engineers, but their second most employed category is ‘people and finance’, showing they’re willing to put the money behind their words to create a people-centric environment.
So, Duolingo seems to have it all. They have a fantastic business model accompanied by dynamic marketing and partnership strategies that has helped to grow their platform and userbase. They are seeing impressive growth in top-line figures. They have a fantastic company culture led by a true visionary.
And they are being richly rewarded for it by shareholders.
While still down from all-time highs (seen during the ridiculous bubble that popped last year), Duolingo has returned +131% to shareholders who bought at the bottom during November 2022. While those lows provided an attractive price point, the valuation today is looking… less attractive.
Duolingo is currently valued at a whopping 16.5x 2022 revenues, and 122x 2022 cash flows. This is a tough one to swallow, especially for a company that isn’t realizing profits on a number of their products. Still, they are being rewarded for the significant growth in their revenues and userbase, which investors clearly see as continuing forward for the foreseeable future, and for good reason - management raised their guidance for FY23 revenues to $509m, good for a 38% YoY growth figure and an encouraging sign for investors. Peeping at their forward P/S based off that revenue outlook, they’re trading at ~12x 2023 revenues - better, but still lofty.
Here’s the part where I whip out my highly advanced, back-of-the-napkin math that I’m sure would make many institutional investors cringe inwardly;
Conservative Model: The company finds it is not able to tap much more of the language learning market as a result of competitors stealing market share. They are not able to roll out significantly better products or new features as a result of the subsequent damage to their data advantage. As a result, their revenue growth declines significantly;
I assume an 18.7% CAGR for sales from 2023-2028, putting their sales at a terminal value of roughly $1.2bn.
This is based off a 32% growth from 2023 → 2024 that declines down to just 8% growth from 2027 → 2028.
I assume a multiple compression, from a P/S of 12 to 5x sales, which is still relatively strong, but the decline is due to greater margin pressures.
This would place the company’s terminal value market cap at $6bn, good for roughly no movement over 5 years, and in fact not very good at all. Obviously, that’s not super ideal for investors. This is assuming the future for Duolingo is pretty bleak.
Bullish Model: The company is able to leverage its branding and partnerships to significantly expand into its $60bn market opportunity - subscriber count and penetration into MAUs continues to grow at a healthy clip, especially in the first few years after the release of Duolingo Max, and the rollout of new education apps like Duolingo Music provides new growth for the company over time.
I assume a 24.6% CAGR in revenues from 2023-2028, placing their sales figure at $1.53bn by 2028.
This is based off a 34% growth rate from 2023 → 2024, ending in growth of 16% from 2027 → 2028.
I assume a small multiple compression from 12x sales to 10x sales, as a result of slightly lower revenue growth, though still a rich valuation due to high margins and sustained growth in sales and users.
I arrive at a $15.3bn market cap by 2028, which would see a CAGR of 20% from today’s market value. This would be exceptionally above average market returns, and passes my personal hurdle rate of 15% for potential investments.
It really could go either way. This is a young company that is richly valued for success in an industry where no big player has really dominated to date. If they are able to break that mold, they could see amazing success that places them more in the bullish model, or they could completely bust for the same reasons other companies have, and end up in the bearish camp. More likely, I’m wrong on both counts and it arrives somewhere in the middle.
Still, I don’t see the bullish model as being entirely unrealistic. Let’s say MAUs continue to grow at a decent clip to 150 million in 2028 - a 107% total growth rate, which would be quite impressive but not wholly undoable. Let’s also say that the subscriber penetration also grows to reach 10% by that same year, and that both pricing and revenue allocation (premium vs. ads, English test, & in-app purchases) remain the same - 15 million subscribers would account for ~855m in revenues, and advertising and the English test accounting for the other $366m for total revenues of $1221bn. Based off this model and a P/S compression down to 10x, Duolingo would see a CAGR of ~15% through to 2028. This is before considering the potential gains realized through the release of Duolingo Music or other educational apps, or a potential increase in premium subscribers from Duolingo Max.
That is still taking into account a fair bit of optimism for Duolingo’s future, but based off what we’ve learned on the business model, their ability to execute to date, and the visionaries leading the company, I think this is very much in the realm of possibilities.
At current share prices, analysts don’t see a ton of upside over the short-term; though the 1-year target of $193 offers a 29% upside, the average analyst target suggest a paltry ~6% upside, while the low target would result in a (-12%) return.
There seems to be a fair bit of difference in the opinion of analysts, with a 50/50 split on whether the company is a strong buy or a hold at these prices. As always, however, I’ll point out that these are one-year targets by analysts that are less concerned with long-term outlooks, so take their estimates with a grain of salt.
Threats to Share Performance
Overvaluation - Given Duolingo’s rich valuation at present share prices, any misstep could send their share prices tumbling. It only takes one quarter of missed estimates on revenues to change analyst models - while this doesn’t necessarily harm the underlying business, it will certainly make its mark on the share price. This is probably the greatest threat to Duolingo’s share performance over the coming years - the stock is priced to perfection, and if it doesn’t deliver exactly that then shareholders will feel the effects. Simply put, there’s a ton of downside risk at these valuations.
Competition - I covered Duolingo’s competitors above - while I don’t feel any of them pose a real threat to Duolingo at present, there’s no safety in capitalism. There are always smaller players looking for the first sign of weakness from incumbent players so they can pounce in and steal market share. If Duolingo loses a significant amount of users to any of its competitors, their DAUs and MAUs will fall and harm not only their data advantage, but analyst expectations for userbase growth as well. This would in turn impact the share price.
Macro-Economic Conditions - As with many discretionary spend products, Duolingo is more beholden to overall market conditions and sentiment than defensive-oriented companies. While they have seen a lower YoY growth figure than they’ve experienced in the past, the business has so far shown remarkable resilience to this particular impact on their top-line growth metrics.
Management Selling - The last few months have seen a significant amount of sell-off from Duolingo executives, particularly above the $150 mark. I view this as a pretty major red flag, as it suggests that insiders consider the stock overvalued at current prices, and no one would know better than they would. While it doesn’t change my underlying thoughts on the business or the investment opportunity as a whole, it certainly makes me think twice about buying at current share prices.
User Interface Complaints - Duolingo rolled out a new interface for their language learning platform in mid-2022, to the consternation of many of their users. A number of reviews I came across while researching the company made note of their discontent with the new mode of learning forced onto users by the update, which gives customers less freedom to pick and choose what lessons they are doing, instead forcing them through a more rigid learning path. I can see this one both ways - the new model allows for a more gradual learning process that is likely better for learning and overall retention of lessons. At the same time, keeping users happy and engaged is central to Duolingo’s gamification model and value proposition - if this new model, or succeeding ones, alienate their userbase significantly, it could dramatically harm the DAU & MAU growth figures.
Low Switching Costs - Given the abundance of language-learning options and the low costs required to subscribe to any of them, including Duolingo, there is very little reason for users to stay if they find themselves unhappy with Duolingo. It would be very easy and inexpensive for people to switch to another platform, which gives Duolingo very little defense in this area - any major changes to the platform, such as the above-discussed UI update, could drive users away from their products with very little incentive to stay.
Great Culture - Culture can really make or break a company. Having a good culture means that employees are motivated to see the company succeed, and that can only be good for the business. Duolingo’s company culture is universally raved about by those familiar with it - it’s an incredibly mission-driven company headed up by two founders that are set on creating a happy environment alongside a successful business. This is one of the best reasons for an investment into Duolingo.
Consistently Award-Winning Company
Time’s 100 Most influential Companies - 2023
Entrepreneur’s Top Company Culture List - 2018
Apple’s App of the Year 2013 - First for an Educational App
CNBC’s Disruptor 50 List - 2018 & 2019
PCMag’s Best Free Language Learning App - 2020
Duolingo is not able to penetrate its total addressable market. Its products remain much the same and they are not able to produce any extra value for the premium services or roll out new features. Duolingo Max is not able to achieve the success the company thought it would, and as a result suffers increased costs without revenues to offset them. Daily and monthly active users subsequently fall, changing analyst expectations and damaging the share price, as well as harming Duolingo’s capacity to improve products through the data derived from lessons.
Their new apps are complete flops and fail to generate additional revenues, increased brand recognition, or users. Competitors begin to eat up their market share as a result, and Duolingo takes a similar path to Rosetta Stone, which flopped in the public market as people lost interest in the product.
Luis von Ahn continues to push the company towards constant innovation for many years to come, and as a result Duolingo releases a number of value additive features to drive more users onto the platform and increase the percentage of subscribers out of the monthly active userbase. Duolingo Max and the increased ability of AI to improve one-on-one learning and conversational skills expands the userbase significantly, and the flywheel is fully engaged. The company is able to reduce prices from the amount of people using the product and in turn attracts more customers.
Duolingo Music is a huge success upon release, and it is only the beginning for Duolingo - they continue to expand into other education spheres with great success. Their strategic partnerships further grow the brand, while the Duolingo English test becomes more widely accepted to provide a respectable chunk of profit for the company. Acquisitions ramp up to provide yet more value to the business.
The sustained growth in MAUs and DAUs, gross margins, and top-line revenues encourage a positive sentiment among investors, as do growing cash flows that provide the company with dry powder for acquisitions and financial stability. They increasingly move to profitability as time goes on, and investors who got in early are suddenly looking at what was once a $6bn company turn into a $20-$30bn company in front of their eyes.
Everyone is happy.
As a shareholder, I fall more into the ‘bull case’ camp described above. My investment thesis in the company is that language learning is never going to die out, and will instead continue to grow. With von Ahn at the helm for years to come, innovation and metric-focused growth will consistently improve the products and subsequently the returns for investors as well. Duolingo is able to pull a number of its growth levers for increased revenues and cash flow, and continues to show fiscal responsibility while moving towards profitability.
The Short Story
Duolingo is an exciting and very well-marketed company that is growing its brand, profits, and userbase exceptionally fast. They have become synonymous with learning a language, and their ambitions for becoming a robust education platform suggest they have a lot of growth ahead of them. Their product becomes more valuable with each user that joins, creating an attractive flywheel for product, revenue, and user growth.
Duolingo’s expansion into offering the English Proficiency Test and work with universities to make this a widely-accepted standard demonstrates the company’s willingness to expand the business while staying true to their core mission.
They’re operating in a fragmented industry with a huge and growing market opportunity ahead of them, of which they have only captured a small portion. Duolingo has a number of competitors, but holds a leadership position in the space through their brand recognition, savvy marketing, and data advantage that feeds into a network effect that should fuel further growth.
They have created an excellent company culture and built an innovative, driven team headed up by a brilliant founder & CEO, Luis von Ahn.
Their current share price seems unattractive to me, but the underlying business is still incredibly strong and could be a great long-term hold for patient investors. I myself am a shareholder, and a strong believer in the ability of this business to grow into the future. That said, my position is quite small, and I’m cognizant of the risk associated with an investment in this company. It’s one I will have to continue to monitor very closely every quarter to ensure it’s sticking to my models and growth expectations.
Now, it’s time to hand out Duolingo’s report card;
Final Grade: A-
Thank you for sticking around, and I hope this article serves as a good foundation for further research into the company, or to drop it off your watchlist if you find yourself less interested post-read. Please let me stress, I’m not a financial advisor - don’t make decisions based solely on what you read in this article.
Happy investing folks!
A huge shoutout to the new Hourglass Researcher - Ewan Jones - for his contribution to this article. Thanks for all your efforts, and welcome to the team, Ewan!