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We came across a bullish thesis on Duolingo, Inc. (DUOL) on Substack by Antonio Linares. In this article, we will summarize the bulls’ thesis on DUOL. Duolingo, Inc. (DUOL)'s share was trading at $347.64 as of Nov 27th. DUOL’s trailing and forward P/E were 189.97 and 112.36 respectively according to Yahoo Finance.
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Duolingo, often perceived as just a language-learning app, is quietly building an infrastructure that can revolutionize global education. At its core, Duolingo’s organizational algorithm focuses on enhancing student motivation, which leads to better engagement and improved learning outcomes, driving financial growth. This approach allows Duolingo to deliver superior educational experiences at a fraction of the cost of traditional methods, even in the face of abundant free content online. The company’s ability to motivate students, despite the availability of free resources, has translated into impressive financial results, with free cash flow per share increasing significantly since 2021.
The company's growth trajectory is driven by a unique form of "process power," which refers to the organizational strength behind consistent, small improvements that compound over time. In Q3 2024, Duolingo’s daily active users (DAUs) grew by 50% year-over-year, continuing the momentum from the previous year. CEO Luis von Ahn attributes this success to constant improvements in features, such as the introduction of "Friends Streak," which enhances user retention. These incremental improvements indicate Duolingo's culture of rapid iteration, which consistently optimizes the user experience and keeps users engaged.
Duolingo’s success, however, wasn’t guaranteed. When first analyzing the company, there was concern about the heavy reliance on English-speaking countries for revenue. This posed a potential risk during economic downturns, as learning English in non-English speaking countries directly correlates to higher salaries, while English-learning in English-speaking countries is more recreational. By Q3 2024, Duolingo had already made substantial progress in addressing this issue, with over 2 million DAUs now using the platform to learn intermediate English. This development is a testament to Duolingo’s ability to adapt and solve problems efficiently, a hallmark of its process power.
Duolingo’s growth also benefits from its ability to decrease the cost of change. As the company continues to expand its experiments, it increases testing frequency, enabling faster adaptation and improvement. The success rate of these tests hovers around 50%, yet the sheer volume of experiments conducted allows the company to refine its user experience continually. This ability to rapidly test and implement changes is crucial in sustaining Duolingo’s competitive edge and growth.