Is It Too Late to Buy Duolingo Stock?

Shares of online education company Duolingo (DUOL -1.35%) experienced an outstanding 2023, more than doubling from a 52-week low of $116.82 last May. The stock remains not far from its 52-week high of $245.87 reached in December.

With Duolingo’s outsize share price growth, does this mean you’ve missed the boat to buy? Not necessarily — although it helps to temper your expectations since it’s no small feat for shares to double in a year.

The company possesses many characteristics that make it an attractive investment when holding shares for the long haul. To help you evaluate buying the language app maker’s stock, let’s take a deeper look into Duolingo as a long-term investment.

Duolingo’s successful strategy

The past year’s rise in Duolingo stock is thanks to the company’s spectacular business performance. Revenue in 2023 totaled $531.1 million, a whopping 44% increase over 2022.

The company’s success comes from a winning product strategy. Duolingo expanded from offering a handful of online language courses when it started in 2011 to over 40 today, including Latin and Navajo.

Duolingo gamified the experience to make learning fun. Now, it’s extending this model into non-language courses, such as math and music.

The company’s expansive selection of languages led to growth in its user base. Since its initial public offering (IPO) in 2021, Duolingo has added more than 50 million monthly active users (MAUs). Duolingo exited 2023 with 88.4 million MAUs, a staggering 46% year-over-year increase.

Duolingo’s freemium pricing model contributed to its product’s success. The company allows consumers to use its digital education platform for free in exchange for seeing advertisements. This enables customers to try out Duolingo’s automated teaching experience and use it as long as they want at no cost, removing friction for new users to join.

Advertising isn’t Duolingo’s only revenue source, however. If a user decides they no longer want to see ads, they can pay for a subscription plan. Only a small percentage of Duolingo’s MAUs choose to subscribe, but it still represents 6.6 million people thanks to the company’s massive user base.

In fact, subscription income comprises the bulk of Duolingo’s sales. The company generated $404.7 million of its $531.1 million in 2023 revenue from subscriptions.

Duolingo’s robust financials

Duolingo’s impressive increase in MAUs, and subsequent revenue growth, enabled the company to exit 2023 with strong financials. Its free cash flow (FCF) totaled $144.3 million, a dramatic rise over the prior year’s $46.2 million.

Moreover, the company’s balance sheet is outstanding. Its total assets at the end of 2023 were $954 million, and $747.6 million of that was in cash and equivalents.

Total liabilities were 298.5 million, but $249.2 million constituted deferred revenue. Customers can pay a year of their subscription upfront. Those sales are listed as a liability until Duolingo fulfills the subscription’s terms, then this deferred amount is recognized as revenue.

Duolingo’s huge cash hoard gives it plenty of options for its business. One area it spent more on last year was advertising to help spur sales. The company was strategic about its marketing, focusing its ad spending on social media.

That’s because when friends and family join Duolingo together, it increases retention and customer lifetime value. Because this social component drives usage, Duolingo plans to build social-related features into its product to further increase retention.

Deciding on Duolingo stock

Despite Duolingo’s strong user acquisition in 2023, CEO Luis von Ahn admitted on the recent earnings call that “we can’t accelerate user growth forever.” So the company is working to convert more of its non-paying customer base into subscribers.

For example, the education giant introduced a higher-priced subscription tier in 2023 called Duolingo Max. This tier uses artificial intelligence (AI) to provide new language instruction features, such as lessons where the user converses in the language they’re learning with Duolingo’s AI.

The company’s efforts to convert non-paying customers led the management team to share that in 2024 it expects “continued improvements in free-to-pay conversion.”

Over the long run, Duolingo is poised to see revenue continue to rise as it adds courses beyond language learning and grows its share of paying customers. This and its strong financials make Duolingo shares a buy.

Because the stock isn’t far from its 52-week high, a good approach might be to invest opportunistically. Buy a few shares now, and continue to build your position when the stock price dips in the future.

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