Duolingo Stock - Languages for the Pandemic-era
It's 2020. People are locked in their homes with almost nothing to do except stare at their phones. They no longer have a commute, they don't have to spend an hour each morning getting ready, and they can finally get in a hearty breakfast which gets them ready for their first pantsless Zoom meeting at 9am. So they look for something to do. Make your own bread? Check. Make fluffy Tik Tok coffee? Check. But how about self-improvement?
Related: What Is The Great Resignation?
Many enforced shut-ins took the time to develop a skill. Reading, writing, creating a blog *cough*, or learning a language. Among all the competing language learning systems out there, Duolingo rose to the top. And this week, they officially filed their S-1 to enter into the public markets. So let's take a look at their filing and see if this investment could be worth it or not.
Top-line Numbers:
Ticker: NASDAQ: $DUOL
2020 Revenue: $161.7 million (129% increase YoY)
2021 Q1 Revenue: $55.4 million (97% increase YoY)
Net losses: $13.5 million (600% increase YoY)
How Did Duolingo Start?
Duolingo's founder and CEO, Luis von Ahn, is a Guatemalan immigrant who graduated
from Carnegie Mellon with a PhD in Computer Science, and a background in cryptography, in 2005. He studied specifically "human computation," which is a phrase he actually coined during his thesis work. This refers to combining the human brain along with computational power to figure out problems that neither could solve on their own. This led to him testing pictures and words in a series of exercises between individuals that didn't speak the same language. He took these findings and went on to invent reCAPTCHA, the digital security tool that asks users to identify objects in images to prove they aren't robots (yet), which he sold to Google in 2009. He turned that success into the development of Duolingo, which effectively used the same technology and technique to focus on human language learning, rather than cyber-security.
What's Duolingo's Business?
Duolingo is a mobile-app based language learning company. Started in 2012, the Pittsburgh based startup has made waves for years in the private market, VC space, frequently appearing on CNBC's annual "Disruptor 50" list. Their popularity began to
ascend after global self-help and productivity icon Tim Ferriss disclosed an angel investment in Duolingo in 2011. Ferriss's other investments in Uber, Facebook, Twitter and Wealthfront, among others, have panned out pretty well, so this was a positive step for them.
The service also gained positive traction in the language-learning vertical because it offered one unique selling point: it was free. It put itself up against its paid rivals like Rosetta Stone and came out on top because there was no barrier to entry. Download for free, sign up and get started. Obviously the company had to monetize in some way, so they did move to an ad-supported model, but they have maintained their original promise that there will always be a free version of the app. The free version contains 34 real-world, English-based languages, but there are a ton of combinations if you combine which language you're coming from, to which one you're going to. There are also fictional languages, like Klingon and Dothraki.
If you want to expand your knowledge base within the service, there is a paid model you can pay for on a monthly basis. The pricing models begin monthly at $12.99, or $80 for the year, and give you extra perks like unlimited daily time in the app and downloadable courses to take offline.
Should I Invest in Duolingo?
First of all, do your own research and don't take this single post as a reason why or why not to invest in a specific security. OK, now that the disclosure is out of the way, let's get into it.
I love this company. I think the idea of this is genius. It's an app-based, ad-supported fremium model very similar to the King Candy Crush model from a few years ago. It's a very sticky business model, meaning that someone won't just get up and leave the app because they're likely in the middle of this tailored language experience, and the user is unlikely to want to start over somewhere else. I think the pricing structure is also super competitive, with the main competition costing either hundreds of dollars per year or thousands to own software.
They also have an interesting B2B diversification strategy brewing. They are now offering the "Duolingo English Test," which makes English-language certification more affordable and accessible to students and employees, and that program is growing fast. They are already at over 2,000 institutions that accept the test.
Additionally, they are expanding their "Duolingo for Schools" program, which finally teaches you useful language skills and isn't like how I grew up where I sat next to Pedro in my Spanish class and he taught me hilariously dirty phrases.
Finally, they have SEO out the ass. They claim that the phrase "Duolingo" is searched more than nine times as many times as "learn Spanish," so their brand equity is outstanding.
All that is not necessarily to say that it's perfect. There are some outstanding business risks here that make me nervous:
It's highly dependent on mobile app revenue. The S-1 states that 51% of its revenue comes from Apple's notorious App Store monopoly, and 19% comes from the still-evil-but-slightly-less-evil Google Play store.
2020 could have been an aberration for them. With the world stuck inside with nothing else to do, they could have seen their peak of users searching for new activities, and it could be downhill from here on the B2C side of the house.
Will I Invest in Duolingo?
Oh yeah. I love this company, the founder is an actual MacArthur Grant certified genius who basically invented the field and it has some strong names behind it. It's sticky, and their net losses while large, were not out of hand considering their revenue. I'm also interested in testing the new pre-IPO buy in that is being offered with this company through Robinhood and SoFi. I will be investing in Duolingo and holding for years to come.
Short-term: Long
Long-term: Long
Disclaimer: The author has no current financial interest in Duolingo. Please do your own research and purchase at your own risk. This is not to be considered investment advice. Please assess your own risk tolerance prior to investing.
