We came across a bullish thesis on Duolingo, Inc. (DUOL) on Data Driven Investing’s Substack by Data Driven Investing. In this article we will summarize the bulls’ thesis on DUOL. Duolingo, Inc. (DUOL) share was trading at $264 as of Sept 19th.
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Duolingo stands out among the companies the user tracks due to its relentless focus on incremental improvements in its language learning platform. Operating primarily as a software-as-a-service (SaaS) company, Duolingo sells premium app features through a subscription model. Duolingo’s unique approach transforms the often monotonous process of language learning into an engaging experience, allowing users to enjoy the journey while accumulating the necessary practice.
Central to Duolingo’s success is its commitment to testing everything, akin to the methodology that propelled the British Cycling team to prominence. This principle drives the company to run extensive A/B tests on various aspects of its platform, from user experience to monetization strategies. For instance, features like animated skill icons and new leaderboard leagues have emerged directly from these experiments. Notably, they once tested an offline feature that inadvertently decreased user retention, illustrating their prioritization of long-term learning over short-term gains. This constant optimization leads to a virtuous cycle, enabling Duolingo to enhance user engagement and monetization steadily.
The company exhibits strong financial metrics, with revenue, gross profit, and free cash flow trending upward since going public in Q2 2021. Their consistent topline growth has ranged from 40.6% to 51.3% for three consecutive years, while free cash flow margins are climbing. Despite concerns over AI disruption in language learning, Duolingo’s gross margins remain robust, indicating that competitors haven’t eroded their pricing power. As user engagement deepens, marketing efficiencies are improving, further validating the effectiveness of their iterative approach.
Duolingo’s Rule of 40 score stands at an impressive 67.6, the highest among public SaaS companies, reflecting its balance of growth and profitability. This strong performance suggests that it deserves a premium valuation compared to peers. Currently, Duolingo’s stock price appears undervalued, and if it aligns with historical trends, it could experience substantial appreciation.
Duolingo, Inc. is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 35 hedge fund portfolios held DUOL at the end of the second quarter which was 43 in the previous quarter. While we acknowledge the risk and potential of DUOL as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DUOL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.