Could Duolingo be in the portfolio?

Hello everyone,

Just got permission to post again because I have gone back and reviewed Duolingo as a possible investment. They only just recently IPO’d, and there wasn’t much I was super interested in with no public track record at the time. We are finally doing a couples trip internationally, so both of us are back to using the App again.

I really liked the app while I was testing it way back when, but with no set purpose, I kinda wandered off to other short term interests.

This is the one other post about Duolingo (DUOL) if found on the board. (WE CAN NOW SEARCH!!!))

First mention. No deep dive - Investment Analysis Clubs / Saul’s Investing Discussions - Motley Fool Community – Qazulight

Link to IR page - Investor Relations - Duolingo, Inc. (gcs-web.com)

First the numbers I can remember to look at, they look like decent SAAS type numbers for a young public company. (Percentages are yoy numbers it seems.)

Subscriber growth

2-'21 3-'21 4-'21 1-'22 2-'22
37.9 41.7 42.4 49.2 49.5
-3% 15% 31% 31%

Paid subscriber growth

2-'21 3-'21 4-'21 1-'22 2-'22
1.9 2.2 2.5 2.9 3.3
46% 49% 56% 60% 71%

Revenue growth

2-'21 3-'21 4-'21 1-'22 2-'22
58.8 63.6 73 81.2 88.4
47% 40% 51% 47% 50%

Margins

2-'21 3-'21 4-'21 1-'22 2-'22
71.60% 72.7 73.50% 73%

Thoughts – These margin numbers are pretty darn good and show that they are more like our SAAS companies on this board. They do not have “hardware” or anything that needs to sell with low margins (ie – TOST). They are growing both overall subscribers and paid subscribers each quarter they’ve been public. It is not blistering growth, but it looks solid. They even pointed out that negative impacts like the war in Ukraine have led people to the platform to learn Ukrainian. Interesting.

I find all of these numbers intriguing and with their share price coming back down from the heady IPO days, it seems like a decent price to start a small position to watch this one.

Now a few details I like from their presentations

Revenue mix:

  • Sub = 74%
  • Advert = 13%
  • English Lang Test (DET) = 10%*
  • Other = 3%**

*The DET is now used for international admissions by more than 3,600 higher education programs worldwide.

**Other primarily includes in-app sales of virtual goods

Other notes:

  • We’re proud of this outperformance, especially in light of the uncertain macroeconomic environment. Taking both of these factors into account, we’re raising our 2022 full year guidance, which now reflects 38% year over year growth in total bookings.

  • This year, we’re focused on expanding acceptance in institutions in four strategically important countries: US, Canada, UK, and Australia. As of the end of Q2, over 3,700 higher education programs accept the DET

Thoughts – I have now learned that they are not a one trick pony. That was a concern before we had a few quarters of information. Now they are actively expanding to areas related to their expertise of online education. Advertising on the platform is a way to monetize free users like me when I am just practicing. Growing subscriber numbers, regardless of churn would help make this worth more to advertisers. They have that last bullet in their shareholder letter, and it shows they are actively trying to expand beyond just the app, but using IP they already have and own. So they can get two income streams of that one instance.

Lastly, they raised guidance in this period, a period when everyone is so worried about spending slowdowns, inflation and interest rates. They are showing a lot of confidence here.

Wrap up – I am an investor that isn’t just focused on Sauldom stocks, so I have a few stocks in my smallest positions that don’t warrant conversation here. They are in my portfolio to make me follow the news and the earnings releases, but they are small enough that I could recoup that money on options (also not for discussion here) so it is money I am willing to risk. I think DUOL could be a Sauldom stock, but in a lower conviction level, and it might not grow at the blistering pace people got used to two years ago. I will open a test position, and I am (GASP) going to pull money out of Monday to do it. I have more confidence in DUOL level of execution risk than I do in one collaboration software to rule them all.

33 Likes

Hi. Thank you for bringing this up to the board. Its nice to noodle on some other companies and contrast/compare.

Their industry, market & moat weren’t clear to me. Also, while the growth acceleration looks pretty good, it wasn’t apparent to me if we’re talking about a very small company (comparable to MNDY) or a larger one.

I did a bit of research and it looks like they help with learning a new language. Also, last quarter, their revenue was about 88M; so smaller than MNDY. Below I grabbed from Koyfin

I have a few hesitations about investing in this company.

  1. I don’t see a competitive advantage for them, moat. It seems to me, there are a lot of quality competitors.
  2. For a company this small, their growth seems low

Admittedly, I don’t really know their market landscape. In your research on them, what do you find compelling outside of the pure numbers and what makes you think they can and will be able to continue this growth rate for a long time or raise their growth rate significantly?

If I bought them, I’d probably have to sell some CRWD or DDOG or a bit of everything in my portfolio.

24 Likes

Hi dlbuffy
I have used 2 apps to learn English and another languages

  1. Duolingo, 2. Busuu

I only paid for Busuu, but Duolingo I used it for free.
Maybe Duolingo will be a good company, but for me, I can not find the moat of it.

5 Likes

Having been a language major in college, I tried out Duolingo several years ago. My biggest complaint, from the perspective of a user, was that the words and phrases it taught me were ridiculous. I can now say “I am a penguin” in Spanish. Really, that was one of the actual phrases.

It was of some help in helping me brush up on languages I had already learned but had waned due to lack of use. But until you hear “Yo soy un penguino” regularly on the streets–or perhaps in zoos–I don’t see how the company gains enough traction to really take off.

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I read S-1 of Duolingo

Free Users:
They become advocates for Duolingo and provide word-of-mouth publicity for our product, which enables our growth and has allowed us to make very selective and efficient marketing investments.

Me: Yes, I agree with it. When my friends want to learn a language I will introduce it to them

Subscription
Our subscription offering is called Duolingo Plus. It offers learners features such as an ad-free experience, along with additional learning and gamification features that enhance their learning experience. One such enhancement is unlimited Hearts, which gives learners more flexibility in how they move through course content.

Me: ad-free and unlimited Hearts. I have never subscription it and I have used it for free until now, with no ads, and have unlimited Hearts.

Just share my experience
I have used it for 2-3 years.

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I don’t know about moat, but as paying user I find Duolingo addictive.

Cheers Qazulight

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Hi dlbuffy

I was a language major in university, and learned another later in life, too. Both these were pre-internet. I began learning Spanish a few years ago (but didn’t continue), and tried out the free version of Duolingo then. I found it a possibly useful tool (but only one of many needed when learning a language), and also knew I would never pay for it.
I doubt they have a role in a saul-ish portfolio. Ymmv
Coldmountain

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I looked into DuoLingo (DUOL) a bit ago. I came to essentially the same conclusions as @dlbuffy, except with an added dose of confusion regarding potential competition.

I travel the world and have actively used several language learning platforms and talked to many travelers about what they use to learn languages. My conclusion is that the only thing special about DuoLingo is their marketing and brand name recognition.

Not only can DuoLingo be easily replicated, there are already platforms out there which arguably provide superior systems for language learning.

This is also a field where there will always be multiple winners because people learn languages in different ways. Some people will resonate with the DuoLingo methodology, other people will resonate with a different methodology on a different platform. Considering this, how do I even begin to evaluate the potential market for DuoLingo?

In favor of DuoLingo … ask travelers how they learn a new language and the majority say DuoLingo. The company has good marketing, good brand name recognition, and, as noted by @qazulight, it is an addictive platform to many people.

My end conclusion was that while this company might have potential as an investment in a wider scope, it has no place in my portfolio. Its prospects simply cannot match up to other companies we talk about on this board.

13 Likes