The Duolingo share price has returned to its April 2023 levels. At the same time, the platform has become sustainably profitable, with revenue and subscriber numbers having almost tripled.
The market has reassessed the ‘gamification' of learning, worried about competition from language models and the company's new strategic priority, which is to strengthen its user base by improving teaching quality.
At heart, these concerns are reasonable. Language models are a clear threat. Any LLM can now offer exercises similar to Duolingo's. Also, questions can be raised about the group's ability to convert users into paying subscribers, with only 8.5% of users taking that leap.
The inevitable drag on growth has therefore led to a normalization of its valuation. But it is still worth asking whether the market is correctly interpreting Duolingo's outlook.
Duolingo teaches over 40 languages, but above all it is an app that borrows the codes of mobile gaming: daily sessions, leagues amongst friends, experience points, quests and animations that keep users coming back every day. You have to try the app to realise that artificial intelligence is on Duolingo's side rather than a competitor. The playful experience far exceeds what ChatGPT, Gemini and the rest offer. Especially since they do not nudge us daily to remind our dopamine-seeking brains of our goals. Last quarter, 86% of active users maintained a streak of seven days or more, 40% between seven and 30 days, and 12% beyond a year.
Even if Duolingo does not make you bilingual - some devoted users certainly have become - you keep on coming back for all these reasons.
All the more so because Duolingo is no longer only a language platform. It is expanding into broader learning, from chess to mental arithmetic and music. There is indeed significant potential for vertical growth. Granted, you won't become an expert, but that is not the goal. The app aims to democratise access to the basics of knowledge by removing the usual barriers: fear of judgement, lack of fun or lack of time, for example.
One of the key indicators watched during earnings releases is subscriber growth and the group's guidance on that same metric. Duolingo said it expects a 22% increase in the last quarter, below analysts' expectations. That proved costly for the stock (-27% that session), but long- or medium-term investors should not see it as a change in fundamentals. It is even reassuring that Luis von Ahn, the founder and CEO, is more concerned with his long-term mission than with Wall Street's whims.
For these investors, Duolingo is full of positive signals. Growth remains robust: 50 million daily users, up more than 30% year-on-year in the last quarter, and 11 million paying subscribers, up over 40% on the same basis. Profits and operating cash flows are expected to rise by over 30% again this quarter. The company is betting on teaching quality with research investment that already accounted for a third of revenue even before the recent announcement of an intensification to come. A strategy made possible by its profitability, whereas similar platforms often remain loss-making.
Ultimately, it is impossible to be certain that Duolingo is a bargain. The lack of truly comparable competitors and uncertainty around the market's potential size make its valuation highly sensitive to Wall Street's mood. The stock remains very volatile, and any slowdown in active-user growth would undermine a large part of the investment thesis. This is therefore not a case of charging in head first, but simply of recognising that the level of risk now appears to be more fairly compensated by the potential return.
