Could Duolingo be in the portfolio?

Investment Analysis Clubs Saul’s Investing Discussions
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Bear, I can provide a little bit of color to the business as someone who both learns languages and talks to many people (travelers) who also learn languages. Note that this is a “boots on the ground” musing, not an investment analysis.

The most obvious explanation I see is that no other language system is marketed to the extent of Duolingo. There are apps and systems which are objectively far superior for learning languages yet they have virtually no marketing presence. In recent months I have encountered many Duolingo advertisements and only one for a competitor. Possibly as many as 100 Duolingo ads for every ad by a competitor. The well known competitors to Duolingo are mostly well known because of past success or because they are “not Duolingo”, rather than because they are actively marketed.

Among travelers I meet who are learning languages, there is a great deal of disagreement on the usefulness of Duolingo. However, everyone knows of Duolingo. There is no other language learning system which in existence which is so widely known.

A large part of the fame of Duolingo is that it learned its lessons not from language learning, but from mobile gaming. Everything that makes mobile gaming a profitable industry has been applied to Duolingo. On top of that, Duolingo has finally begun making changes to improve the actual learning aspect of the app, which has brought some users back to the platform who had previously abandoned it for having insufficient learning resources. While I personally firmly believe Duolingo is a horrible system for learning a language, even after recent improvements, this gamification aspect cannot be ignored. Many people don’t have the dedication to stick with learning a language for its own sake.

I would also not be surprised if the post-covid travel surge has led to a corresponding surge in post-covid language learning.

All that said, I agree with you and am equally bewildered at this company and don’t know what to think of its recent success.

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Bear,

I have been paying for the app for over two years. My wife and I have done at least one lesson every day for 700 days. We spend about 30 minutes a day in the app.

We are anxious to get through the next year and maybe do some immersion training in Gautama. We have day dreams of learning French, Portuguese and Italian also. I see this as a sticky app. While the social aspect is very limited within the app, we can share success with friends via text and social media, so there is that social media stickiness.

I have a family plan which allows 6 people to be on the plan. I have allowed various people and no one other than my wife and I have had long learning streaks or spent time in the diamond league. So, not everyone will stick, probably less than 20 percent (That has been our experience).

While I do use the service, I have not bought shares :frowning:. If I buy some I will let you know so you can short it. I will be expecting a ride on your new jet when you get rich.

Cheers
Qazulight

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So I said (I think) a while back that this company reminds me of Wix because they have a giant cohort of free users with a conversion of subscription users. Both the amount of total users and the conversion rate are amazing to me.

This quarter their monthly active users were 83.1m. Roughly 1% of the world’s population…meaning 1 out of every 100 people use Duolino regularly. According to this that’s more than Apple Music, more than Amazon Prime Video, more than Disney+. List of content platforms by monthly active users - Wikipedia

So that’s amazing. But the conversion rate is equally amazing to me. 5.8m of these 83.1m users (~7%) pay for Duolingo. That’s incredibly high – Wix was always around 3% to my recollection.

The other thing about the conversion rate is that even with “monthly actives,” I can’t believe all these people are really “active.” Only 24.2m of the 83.1 are “daily active users,” which makes the fact that 5.8m of them pay for Duolingo even more incredible.

The numbers are amazing…and get this, they’re now GAAP profitable. The last 2 quarters actually. But at this run rate the PE is around 700. So this is a price I’m not willing to pay for the stock. Even if they 10x profits, the stock is still too expensive.

And these numbers are almost too amazing in a way. When Netflix was still growing amazingly in 2018, the stock got to around $400. I started to talk about how saturated they were getting. They were nearing 50m households in the US – there are only just over 100m US households total! Now, 5 years later, they’ve roughly doubled subscribers world wide (though of course not in the US) and yet the stock has woefully underperformed the market.

In other words, TAM matters. If you see Duolingo getting to 1b users (LOL) like YouTube or TikTok…well, you see a different future than I do.

Still amazed at what Duolino has done. But I wouldn’t touch this stock at $200+.

Bear

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Daily and monthly active users are reported.

User Metrics               Q3 2022   Q3 2023
Daily Active Users        14.9M      24.2M      63% YoY
Monthly Active Users      56.5M      83.1M      47% YoY

As for the daily vs monthly users, I was a daily user when we were planning a trip to France. I am now probably a monthly user because I use it when I have my phone with me and I’ve already read all the magazines next to where I am…ahem…sitting.
What I feel people are not seeing on this line of thought is that even the unpaid users are making money for the company. I get at least three to four adverts in that one short lesson. That is income even if I am not paying.

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From Duo’s website and reports-

“Large addressable market: Over 2B people in the world are learning a foreign language and much of this is shifting online.”

“We also have a significant opportunity to impact more learners around the world by extending our platform beyond language learning. According to HolonIQ, approximately $6 trillion was spent on education globally in 2019. And GSV Ventures reports that $160 billion was spent on digital learning, with digital spend expected to grow at a 26% CAGR from 2019 to 2026. We believe we can expand our addressable market by extending our scalable platform to other segments of learning such as literacy and math.”

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I deleted my post above because I should have done my homework better. I thought perhaps they were counting all members of a family plan, including the ones that did not actually use the app as a paid subscriber, which they don’t.

From their definitions in their press release:

“Paid Subscribers. Paid subscribers are defined as users who pay for access to any Duolingo subscription offering and had an active subscription as of the end of the measurement period. Each unique user account is treated as a single paid subscriber regardless of whether such user purchases multiple subscriptions, and the count of paid subscribers does not include users who are currently on a free trial or who are non-paying members of a family plan.”

I’ve also now took the time to read the latest ER and their financials and this is indeed a very impressive company. And the paid subscriber count is one of the most impressive, at 60% up yoy.

-wsm

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Consider me in the group that does not comprehend how this is a 10B business let alone a 1B business. The biggest risk I see that this is a fad or temporary surge in popularity that is not sustainable over the long term.

Just anecdotally I’ve heard of a few people mention the app and say how they are trying to keep their “streak” going. The app looks to gamify language learning and can be fairly addictive in this way. I’ve also used the app myself for a few weeks but maybe didn’t find the streaks as compelling as others I have spoken with.

The business this reminds me most of is Peleton. It seemed like a couple years ago everyone was talking about the bike, but it wasn’t possible to grow the enthusiasm beyond this peak point. Granted Duo doesn’t have inventory and physical hardware to sell, but I do see this as a product which is currently at peak popularity and not enough room to grow for years.

Lastly I’m having trouble understanding what the moat is. Breadth of languages could be one, but there is no vendor lockin or rip out costs like traditional SaaS. As far as I can tell it would be simple enough for a user to switch apps easily.

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So, we are probably going to break some rules, I’m ok if Saul needs to step in here.

As for other language apps - they are NOT the same.
Here is Wired’s ranking - 8 Best Language Learning Apps (2023): Online Courses and a Pocket Translator | WIRED

As for not real learning, I get that nothing is better than flying to a country and jumping into the fire…if you are 10yrs old. (I am an American that became fluent in Afrikaans at 9 because we moved there. Instantly forgot it all by 11 when we moved back.) Adult brains do not work so well with that and need courses that teach the basics and provide correction.

As for all the experts, well they are judging university classes against solitary learning, yes there are differences, but there are ways to deal with it. Also, there are online university courses if you want to pay money and enroll at a university, but the reason for an app…is because you don’t want to.

As for it being peleton…well no. People have been trying to learn languages for millennium…peloton was just dumb and I never invested in that. I have a degree in exercise science and the number of fads I have seen in DECADES of adulthood had me Nope’ing right out of that idea.

As for moat, that seems to be some tangental idea that comes up when people cannot find a better reason. The differentiators here are more important to me.
Language -

  • the constant testing of content
  • the AI integration
  • the variety of languages
  • the full course load FOR FREE (ad supported)
  • the reinforcement of missed words
  • the corrective feedback for multiple misses
    (I am not so concerned about the gamification, and I do find it annoying that it makes me choose a streak timeline to commit to at times, but these are minor.)

Company -

They are not a one trick pony here. I’ve laid a lot of this out already up toward the start of this thread. So many people come back to the same arguments. I just don’t feel that people are actually looking at the business and not just their feelings about an “app”.

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I’m a little late to the discussion as I had to get approval to post first.

I want to point out that Duolingo publishes numerous blog posts with data points that you can use in conjunction with the shareholder letters to infer some trends. Opening up recent “Annual Duolingo Language Reports” or age related blog posts starts to paint a clearer picture of how this company continues to grow its paid users.

According to a post in 2022, 60% of their users are under the age of 30 with the largest category of user being ages 13-17 (~22%). Millennials and Gen-Z are a majority of their user base, and those groups of people place a higher emphasis on global travel than older generations. In the language reports, one of the highest cited reasons for using Duolingo is to gain comfortability while traveling.

To piggyback off of the above points about gamification, these younger groups of people are also the most exposed and engaged with mobile gaming. If you look at the Q3 shareholder letter, you’ll notice that ‘Other’ category of in-app purchases grew by 86% YoY. While this is still the smallest percentage of their revenue - this is essentially just the sale of ‘game enhancing products’. The virtual currency is used for things like time extensions in timed lessons. They also utilize push notifications and daily streaks to keep users actively engaged. These ’streaks’ are used in just about every mobile application for young people, snapchat, Roblox etc. The goal is to keep getting young people to open up and interact with the application every day.

There can certainly be some arguments around the efficacy of Duolingo as a mechanism for learning a language, but for people who are using it seriously to try and learn, a subscription is a no brainer. Without a subscription, you have “lives” that are erased every time you make a mistake which refresh every few hours. I have personally been a paid user of Duolingo for a long time, (I currently have a 1215 day streak) and have completed the full Chinese course. My annual subscription recently expired and I spent about a week trialing the free version and it is insufferable to use for an extended period of time. Duolingo on its own is obviously not going to make anyone fluent, but it has given me the ability to have a ~2000 character vocabulary. I do think it is more helpful for certain languages than others - particularly for reading character based languages I think it is a wonderful tool that you can use to practice without having to “lesson plan” yourself.

Lastly, I’ll speak on their innovation efforts. They were early movers into the adoption of Chat-GPT into their French and Spanish courses. If you have a “Max” subscription, you are able to get real-time feedback on each question, as well as “chat” in your target language. I have not played with it myself, because it isn’t available in the Chinese course; but I would have upgraded instantly if it were. In addition to that, they recently added Math and Music courses. I have explored these offerings, and it’s apparent based on the content level that they are designed with children in mind. It seems to me that they have identified that if they get users engaged from a young age, those users will go on to be paid subscribers.

I owned shares between spring of 2022 and spring of 2023, but currently have no position.

Rick

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Hi Rick
Thanks for the comments.
Wrt your efforts to learn Chinese, is duo your only method? Have you supplemented it with more traditional methods (or vice versa). Has duo had any effect on your aural comprehension, or on your ability to speak Chinese?

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The annual language report that I referenced above was just posted for 2023 today. Again highlighting some of the color behind who and why new subscriber growth continues.

Rick

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I start getting nervous when my winners keep winning without new news. I am just noticing that DUO has gone up >200% year to date (ytd). This has me scratching my head a little because this seems to be way more than some big/more popular stock names.

Looking back over three years, it is only up 65%, so that is about 20% return which is pretty good, but less confusing than looking at just last year with all the recession/inflation fears driving the market down.

Still looking for some sort of trend to explain this, but they did grow at over 40% revenue and are maintaining that >70% margin. Maybe that is all it takes?

I just get seriously gun shy when I see big returns and want to start ‘banking’ them. But it also is a sure way for me to limit my returns over time.

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I’ve been pretty happy with the operating performance of the business. The Stock Market Nerd has a free newsletter that happens to cover DUOL quite well, and I usually find his analysis thorough and convincing.

I would add that the investing mistake which has cost me the most over the years, without a doubt, has been to take my profits – or even just some of my profits – too soon.

The most you can lose by making a bad investment purchase is whatever you invested into the position. The most you can lose by selling a profitable business too soon? That’s close enough to “infinite” to be equivalent for me.

ActonUp

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4th Qtr 2023 results posted last night. They really beat earnings this time around, but that seems to miss the point a little. (?)

Both subscriber growth and paid subscriber growth rates dropped a bit this time around. So they did make the most money ever, but they ‘could’ be slowing. (Or, it could be a blip, who knows at this point.)

Revenue growth still looks good and margins stay in the low 70’s. This is a cash making company, but I am still feeling a bit hum ho about future growth. I have reallocated most of my portfolio in last few months to balance out a few decent gains and get all my positions back to correct allocations. DUOL was one I rebalanced about a month back, but I also trimmed it a bit. It was a bit over 6% allocation but I dropped that to about 3% just for comfort.

Up at 20% pre-market this morning. I’ll probably leave this position size alone for now, but if we get another few days of positive returns, I might actually re-allocate again. This is one winner that I think the numbers look good, but I have taken on some of the Sauldom skepticism related to how long can this last?

Also, I am not seeing the break out of other areas this time around. Nothing on the math learning that I can see. Also the English testing is up 29%, but that is because teh numbers are still so small, from 8 mill users a year ago to 10mil this quarter. Should I expect faster growth in a year, I would expect to, I think.

Can you tell I am starting to get a bit wishy washy here. Anyone else got thoughts about how great a company this is?

Numbers:

duol numbers 4-23
duol numbers 4-23939×281 8.5 KB

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I should have bought the stock because I converted from free to paid to avoid the ads. This is very rare for me, I am pretty cheap so it should have been a big green flag to me.

What I do find is that it is so gamified that I find me self doing things to stay in the diamond league (top league) instead of helping me learn better. I also find that after over 400 days of continuous study, I am reaching more difficult subjects, such as past-tense, and without speaking to a fluent person each day, I have too many words and concepts to keep it all in good working order. I wonder if this will make me give up at some point. How many learners feel like me?

I admit, it has helped me a lot and I would recommend it to people, so my bottom line is that it is a buy.

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This is one company that has continuously proven me wrong, and I’m also probably wrong from thinking it’s too late. It is astounding to see that paid user growth has accelerated for 10 consecutive quarters, and management stated that “we expect kind of mid-50s going forward.” That would mean that Q1’24 would likely be another acceleration (4.8 * 55% = 7.44). And then maybe, just maybe, paid user growth will stop accelerating in 2H’24, albeit still growing healthily. This translates to revenue expected to increase mid-40%'s, after rising 44% this year - essentially no deceleration.

Then we have the bottom line, where Duolingo is already generating a 27% FCF margin, and an 18% adj-EBITDA margin, nearly tripling both from the previous year. Operating efficiency continues to improve, with G&A, S&M, and R&D as a percentage of revenue decreasing 7%, 4%, and 4% respectively on a GAAP basis.

Finally to valuation, assuming a slight beat of FY expectations puts them at ~39x NTM FCF, which I interpret at a deserved premium but not crazily elevated. Meanwhile, the business keeps innovating with regional pricing, family bundles, new subjects (e.g., math and music), new revenue avenues (e.g., tests, advertising).

I stopped worrying about a slowdown, a dependence on marketing, and competition. My biggest worry now is the effect if TikTok gets banned in the US, as they have strong engagement and >11M followers. I’d like to hear from others to see if skepticism has increased, decreased…or just other perspectives and observations!

-RMTZP

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I’m not invested, but follow the company out of curiosity from time to time and was wondering what caused DUOL’s stock price to drop by -30% since last week. It seems that the market has been unsettled by a noticeable deceleration in both monthly active users (MAU) and daily active users (DAU).

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Thoughts:

Duolingo (a language learning app) and Monday (a relatively sticky B2B work platform that helps teams manage their projects, tasks, and workflows) share a similar enterprise value ($7b to $8b), similar FCF margins, and - suprisingly - a similar valuation (forward EV/S ~9). Why?

Just a bump or a trend for DUOL? Could genAI potentially disrupt language learning, because people bother less about it? Something else?

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Good stuff. What I noticed in my very brief follow up after earnings was that most talking heads mentioned that the guide wasn’t super impressive.

But, for the numbers you are showing above follow what I saw last earnings release. The number of user adds are slowing still, so that makes me want to follow the previous strategy of holding pat for now. I did pick up ONE share after earnings, just 'cause I had to after that unwarranted (imo) thrashing.

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It’s all about how you phrase things. Duolingo grew faster in Q1’24 than in Q1’23. Meanwhile Monday decelerated from 50% to 34%.

The graph’s y-index magnifies the deceleration much worse than reality. Looking at the ‘raw adds’ tells a different story; it was simply the first quarter in a while where the acceleration didn’t continue - which was a matter of time.

PS: For what it’s worth, I have a larger position in Monday; but thought it’d be worth discussing the other side of the coin regardless.

-RMTZP

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Agreed. The Duolingo user numbers were a deceleration to be sure, but if you look at the raw numbers, it’s still very impressive they’ve gotten so big and are still adding so many:

MAUs
Dec 2022 quarter: 4.2m added
Mar 2023: 11.9m added
Jun 2023: 1.5m
Sep 2023: 9.0m
Dec 2023: 5.3m
Mar 2024: 9.2m

DAUs
Dec 2022: 1.4m added
Mar 2023: 4.0m
Jun 2023: 1.1m
Sep 2023: 2.8m
Dec 2023: 2.7m
Mar 2024: 4.5m

So they actually added more DAUs than in this Q last year.

The really crazy thing is that at any given time, about 24% of DAUs are paid subscribers. There are high amounts of churn, but they always seem to be able to get new subs to more than make up for it, so paid subs are growing like crazy, along with DAUs.

Paid Subs
Dec 2022: 4.3m (0.6m added)
Mar 2023: 4.8m (0.5m added)
Jun 2023: 5.2m (0.4m added)
Sep 2023: 5.8m (0.6m added)
Dec 2023: 6.6m (0.8m added)
Mar 2024: 7.4m (0.8m added)

I continue to be blown away by this conversion to paid users.

While it appears June will be a seasonally down quarter, I thought these numbers were so good, I took a tryout position (~1.5% percent allocation). Being honest, the drop in the share price is part of what pushed me over the edge. I’m not sure if the market decided suddenly to worry that improved AI translators will make people stop wanting to learn languages, but I’m happy to see a little pessimism bring the price down a bit, and who knows, we might see a lower price after the seasonal down quarter coming up. I probably won’t look to build a very large position here, but I’ll leave room to add a bit if we see lower prices. One thing we don’t have to worry about is their ability to print money, as the profit spigot has been engaged:

EPS
Dec 2022: -0.35
Mar 2023: -0.06
Jun 2023: 0.08
Sep 2023: 0.06
Dec 2023: 0.26
Mar 2024: 0.57

Even that 0.57 this quarter was based on a high teens profit margin, so they might have even more margin to wring out. Love it.

Bear

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