Last year taught investors Duolingo's (NASDAQ: DUOL) love language. Shares of the language learning specialist more than tripled, up 219% in 2023. It's been a different story this year. Duolingo stock is trading 18% lower in 2024, going the wrong way in a rising market.
There is still a lot to like in Duolingo. The stock is highly unlikely to triple again in 2024, especially with less than six months to make that happen. However, the ingredients are there for the company behind the popular learning app to deliver outsize returns for the balance of 2024. Let's see what could make the shares regain their 2023 swagger.
1. Duolingo is still growing
You don't have to look hard to find the root of Duolingo stock's 18% slide this year. The shares took an 18% hit on a single day two months ago -- May 9 -- after the company posted poorly received financial results.
The market's negative reaction to the report appears overdone. Revenue rose a better-than-expected 45% to $167.6 million in the first quarter, just ahead of the 42% to 44% increase it was publicly forecasting earlier this year. The 41% increase in bookings and nearly tripling of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) also surpassed its guidance. Duolingo would also go on to raise its outlook for the entire year.
A "beat and raise" performance is often enough to send a stock higher. It didn't play out that way this time. With the shares more than tripling in 2023, it's easy to see why even exceeding analyst targets on both ends of the income statement isn't enough. The good news is that Duolingo is still growing at an impressive clip.
It's not just raw numbers moving in the right direction. Engagement is also on the rise. There are 97.6 million monthly active users firing up Duolingo, a 35% improvement over the past year. That's good. Nearly a third of them -- 31.4 million -- are on the app daily, a 54% jump over the past year. That's better. Watching daily active users growing faster than the monthly figure is a testament to Duolingo's stickiness. Always bet on flypaper.
Image source: Getty Images.
2. The bottom-line beats are significant
There are beats and there there is whatever you call the trouncing that Duolingo has been able to consistently deliver over the past year. Duolingo was landing well ahead of Wall Street profit targets as the stock was rising last year. It continues to do that this year even as the shares have shifted into reverse.
| Quarter | EPS (Estimate) | EPS (Actual) | Beat |
|---|---|---|---|
| Q2 2023 | ($0.19) | $0.08 | 142% |
| Q3 2023 | ($0.11) | $0.06 | 154% |
| Q4 2023 | $0.17 | $0.26 | 53% |
| Q1 2024 | $0.27 | $0.57 | 111% |
Data source: Yahoo! Finance. EPS = earnings per share.
Sometimes you will see this in a losing stock when a company is hosing down its guidance after every report to reset expectations at a lower bar it can clear with ease. This isn't happening at Duolingo. Over the last three months, analyst estimates for this year and 2025 have moved sharply higher -- even as the stock has experienced a double-digit-percentage decline.
3. It's turning headwinds into tailwinds
Duolingo aside, it's been a tricky time for most education stocks. Shares of Chegg -- a provider of online homework help -- have plummeted 69% since the company announced last spring that artificial intelligence (AI) was eating into new user growth. Chegg has now reported eight consecutive quarters of year-over-year declines in revenue. This obviously isn't happening at Duolingo.
Something that has helped set Duolingo apart is the whimsical gaming aspect of the fast-growing app. You can't spell "gamify" without an "A" and an "I," and Duolingo has set itself apart from a more humdrum learning platform that isn't driving its audience to compete with or against friends, family, and a leaderboard of strangers.
As a freemium model, Duolingo is easy for anyone to check out. Open that door and it's a quick-hit world of going on knowledge-widening quests with people you know and completing lessons to collect virtual currency and move up or down leagues populated with fellow learning enthusiasts.
In a time when AI is giving pay models a run for their money, Duolingo's the salmon navigating upstream out of the clutches of the hungry bears. The percentage of Duolingo's monthly active users that have gone premium has increased over the past year. When you put the pen to penetration you're going to win the game as a business model.
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Rick Munarriz has positions in Chegg and Duolingo. The Motley Fool has positions in and recommends Duolingo. The Motley Fool recommends Chegg. The Motley Fool has a disclosure policy.
