Duolingo’s bullish earnings translate into a higher stock price

Duolingo Inc. NYSE:DUOL offers a freemium language learning platform that has taken the world by storm. It uses an incredibly simple, animated and gamified interface to allow children and adults to engage in a cheerful, fun and inviting way to learn new languages. Use short, unintimidating lessons that users can consume in bite-sized chunks at their own pace.

It is a Mr. Miyagi-like Karate Kid approach to language learning in which the user engages in activities that indirectly strengthen language learning skills. Generative artificial intelligence (AI) is integrated to deliver personalized learning and explain user errors through the Explain My Answer feature. This approach has grown its user base to over 500 million students worldwide.

This business services industry company competes with Chegg Inc. NYSE: CHGG, Udemy Inc. NASDAQ: UDMY and privately held Rosetta Stone and Babbel. Duolingo also joined the S&P 400 Mid-Cap Index on April 22, 2024.

The Freemium model pays off

Made popular by free-to-play video games like Fortnite and Electronic Arts Inc. NASDAQ:EA Apex Legends and the similar ad-supported model Alphabet Inc. NASDAQ:GOOGL YouTube, the freemium model attracts new users by allowing them to use free and pay to upgrade premium features and an ad-free experience.

Duolingo also allows new users to use the platform to learn over 40 languages ​​completely free. However, the free version has many ads and limitations that can be alleviated in the premium version called Super Duolingo, priced at $12.99 per month or $59.99 prepaid for a year.

The premium service offers an ad-free experience and features like offline access to lessons, progress quizzes, and unlimited hearts, allowing you to continue lessons without worrying about being blocked after making too many mistakes. Duolingo also offers a Super Family plan for $119.99 per year.

Daily descending triangle

The DUOL daily candlestick chart illustrates a descending triangle pattern that started the descending trend line above the swing high of $245.59 on March 21, 2024. The flat bottomed lower trend line formed at $194.00 when they meet at the apex. The daily relative strength index (RSI) is trading at the 42 band. Pullback support levels are at $184.00, $171.64, $155.72, and $140.16.

Hypergrowth is the norm

Duolingo crushed fourth-quarter 2023 EPS estimates by 22 cents, reporting 26 cents versus analysts’ consensus estimates of 4 cents. Revenue increased 45.4% year-over-year to $150.99 million from $148.29 million. Total bookings increased 51% year over year to $191 million. Subscription bookings increased 57% year-over-year to $157.8 million. Paid subscribers grew 57% year over year to 6.6 million. Daily active users increased 65% year-over-year to 26.9 million, while monthly active users (MAU) grew 46% year-over-year to 88.4 million.

Provide more positive guidance

Duolingo raised its revenue forecast for the first quarter of 2024 from $164 million to $167 million versus $159.35 million. Total bookings are expected to be between $186 million and $190 million. The full-year 2024 peak forecast was raised from $717.5 million to $729.5 million versus consensus estimates of $701.12 million. Total bookings are expected to be between $790 million and $802 million.

Optimistic comment from the CEO

Duolingo CEO and co-founder Luis von Ahn highlighted the extraordinary fourth quarter of 2023, as the company reported record growth in users, revenue profitability, free cash flow and bookings. Since going public in 2021, the company has achieved annual revenue growth of 55% and 45% year-over-year. Duolingo reached an inflection point in 2023, adding more than 13 points of adjusted EBITDA margin to above 17%. This highlights the fact that an incredible product can generate a profitable business.

The Conversion Daisy Chain generates growth

Ahn says the more students he can attract to his platform, the more students he can convert into subscribers. The more subscribers they manage to convert, the more money they will invest in their courses, making them more engaging and fun. Rinse and repeat.

Focusing on the Family Plan

DAU growth has accelerated for 10 consecutive quarters, but Ahn stressed that you can’t accelerate user growth “forever.” They expect DAU growth to be closer to mid-50%. However, 2024 is still expected to see strong revenue performance driven by rapid user growth and conversion of free subscriptions. The company is investing more resources in the family plan, which has proven to have higher loyalty, increasing its LTV. The family plan has grown to 18% of its subscriber base.

Ahn concluded: “Last year we reached an incredible milestone. Our students completed their 100 billionth lesson. Perhaps even more impressive is that we hold approximately 90% of global MAUs for online language learning. Yet we still see so much more potential and opportunity ahead of us.”

Duolingo analyst ratings and price targets I’m on MarketBeat.

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