Duolingo (DUOL) is due to report third-quarter earnings on November 6, 2024. Rising revenue and net income growth have been expected for the educational tech company. Duolingo is enjoying tailwinds that should last for a while, and expansion into additional subjects should increase its appeal. Bullish investors like myself will carefully review Duolingo’s upcoming earnings report, but you should know a few things before the report comes out.
The Language Learning Market Is Booming
This is the best time in history to learn a new language. More people are catching onto that truth, making me feel bullish on the stock. According to Global Market Insights, the language learning market is expected to maintain a compounded annual growth rate of above 20% from now until 2032.
People are traveling more often, and those frequent trips introduce people to more languages. Multi-lingual individuals are more valuable in the workplace and potentially can command higher salaries. Some people learn new languages as a challenge and acquire more than two languages. 2011 research indicated that bilingual learners have an easier time picking up additional languages, and that’s really good news for Duolingo.
Investors should remember that Duolingo offers a gamified experience. The app tracks your daily streak and offers in-app rewards. Users collect gems as they complete lessons and lose a heart each time they answer incorrectly.
Duolingo Gets People to Stick Around
While many apps and educational companies have benefitted from the language learning boom, few companies have done it on the same level as Duolingo. The firm surpassed 100 million monthly active users in the second quarter, which is another reason to be bullish on the stock.
Even better, the company “saw record levels of engagement” and wrapped up the quarter with 34.1 million daily active users, a 59% year-over-year increase. Duolingo also wrapped up the quarter with 8.0 million paid subscribers, a 52% year-over-year increase. Monthly active users increased by 40% year-over-year.
Luis von Ahn, co-founder and CEO of Duolingo, mentioned that over 20% of the company’s daily active users have streaks longer than a year. That means these users have consistently logged into the app daily for over a year. This level of commitment suggests that many of these people will use Duolingo for the rest of their lives, and it also brings the 2011 research back into the spotlight. Duolingo’s gamified experience makes picking up a third language tempting after becoming bilingual. The company has enough languages in its app to turn paid subscribers into lifetime customers.
Profits Have Been Surging
I have been following Duolingo stock for a while, but the company’s switch to profitability and quick margin expansion sparked my interest. Duolingo delivered $24.4 million in profits in Q2 2024, notching a 13.7% net profit margin. Meanwhile, the firm only brought in $3.7 million in the same quarter last year.
Surging profits can quickly address the stock’s only glaring weakness. Duolingo currently trades at a lofty 207 P/E ratio. The valuation was much higher a few months ago, and that’s a testament to how quickly Duolingo has expanded its profit margins. Duolingo has a more generous 102-forward P/E ratio, which is still not the greatest. Investors have been willing to pay a premium for high-growth stocks, and the forward P/E ratio can be shaved considerably if Duolingo reports another successful quarter.
Luckily, Duolingo’s top line is also growing. Rising revenue gives Duolingo more breathing room to expand profits instead of exclusively relying on higher profit margins. The educational tech company delivered 41% year-over-year revenue growth in the second quarter while increasing total bookings by 38% year-over-year. This indicates that the firm should continue to post solid revenue growth.
Is Duolingo Stock a Buy?
Duolingo is currently rated as a Moderate Buy with a projected 4% downside from current levels. The stock has eight buy ratings and four hold ratings. None of the 12 analysts covering Duolingo stock rated it as a sell. The highest price target of $355 per share suggests that Duolingo shares can rally by an additional 22%.
The Bottom Line on Duolingo Stock
Duolingo has established itself as a leading language learning platform since the app first launched in 2011. The app’s gamified experience has resulted in more than 100 million monthly active users, more of which are converting into daily users. Duolingo is also getting plenty of its users to become paid subscribers.
The firm’s rising profit margins should excite long-term investors. Higher profits will reduce the P/E ratio, and significant revenue growth will give the company more room to expand its profits. The language learning boom should be sustained for several years, giving Duolingo stock an excellent opportunity to march higher and maintain the bullish sentiment of investors like me.
