About Duolingo

I have to give credit to my daughter because without her interest in learning Italian, Duolingo was considered a no-go for me. I knew the backstory of the company before the IPO this year, however I rarely buy companies immediately after they go public. I have found that waiting for a price pull back post IPO is more effective than buying immediately.

For those who are not familiar with the company, Duolingo is a technology company that provides a science-based language learning experience. The company’s platform enables users to learn 40 languages within 97 courses online or on their smartphone.

In fact, you might already be familiar with the Chairman of Duolingo, Luis Von Ahn Ph.D. He is most famous for help developing CAPTCHA, which is a type of security measure known as challenge response authentication. Basically, it requires users who are trying to access their account online to first correctly evaluate and enter a sequence of letters or numbers found in a distorted image.

Speak English, right? Let me start over…does this image look familiar?

Luis Von Ahn Ph.D. is a recipient of the MacArthur Fellowship, also known as a “Genius Grant,” and created the cyber-security technology captcha to distinguish a human from a robot.

Interesting to know that in 2001, PayPal used this technology as part of a fraud prevention strategy. In turns out that PayPal cofounder and former CTO Max Levchin helped commercialize CAPTCHA’s early use. Max Levchin is currently the CEO of Affirm Holdings Inc.

The Language Learning Market

What interests me about this company is the language learning market is likely much larger than most investors think. According to Duolingo, over 1.8 billion people in the world are learning a foreign language and the entire language learning market is growing exponentially. So fast that the company is projecting this market will increase from $12 Billion to $47 Billion in just 6 years. (2019 to 2025).

For many people who want to work and raise a family in the United States or Canada, learning a new language is essential part of the immigration process however the opportunity is not just about what happens in North America. We’re talking about a world demand.

How does the Duolingo generate revenue?

The company monetizes its platform in 3 different ways with the largest revenue stream being their subscription user base. The company does offers flexible payment terms both monthly and annually. Second, there is a free subscription option where users are also targeted for paid advertising.

The third revenue stream is in my opinion, the most interesting factor. The company offers certified English language learning with proficiency exams. This is a service that has a very high demand especially with the continued globalization and remote diversification of the workforce. Based on Duolingo’s Q2 earnings report, this service makes up less than 9% of Duolingo’s total revenue stream. If you add Duolingo’s user base which is soaring with active monthly users, the combination between proficiency exams and paid monthly subscribers could help Duolingo reach a higher penetration than its current 1% market capture.

Today, Duolingo is generating about $250 million in gross revenue and has attracted 1% of the overall language learning market. Given how compelling the company’s application user interface is and the strength of the brand, I can see Duolingo capturing a significant portion of market in the next 6 years.

For many people who want to work and raise a family in the United States or Canada, learning a new language is essential part of the immigration process however the opportunity is not just about what happens in North America. We’re talking about a world demand.

Attractive Gross Margins

I am a big believer in high gross margin companies and in the case of Duolingo, we are talking about a gross margin of 71.6% as of 2020. Yes, this type of corporate profile can attract competition however in my opinion, the Duolingo has a superior product.

What is this week’s takeaway?

I believe Duolingo is positioned well for long-term growth however the current price for the stock is not considered cheap. Investors who add Duolingo to their portfolio today may experience higher volatility since their entry price point is high relative to the July IPO launch. Setting these factors aside, Duolingo could be an excellent high growth stock story for patient and long-term investors.

Making more money and gaining market share is exactly what investors want to hear when allocating their capital and Duolingo might be a learn and earn opportunity worth exploring.

Have a great weekend!

Talk soon,

Michael Zagari, FCSI, CIM, CIWM