Shares of online education giant Duolingo(NASDAQ: DUOL) delivered incredible gains to investors over the past year. Last August, the stock was at a 52-week low of $121.89. Since then, shares hit a 52-week high of $251.30 in May but have dropped along with the broader stock market's recent sell-off.
Now, the share price is climbing once more thanks to a stellar second-quarter earnings report. The firm's Q2 revenue rose an impressive 41% year over year to $178.3 million, and that's just the start of its many successes in the quarter.
With the share price on the rise, it begs the question: Is Duolingo stock a worthwhile investment for the long haul, and if so, is now the time to buy? Here's a look at the education company to arrive at an answer.
Factors driving Duolingo's successful business model
Duolingo is best known as an online language-learning app, although it now offers courses in other subjects. The company provides the opportunity to learn over 40 languages for free, and that model is a key factor in its success.
Because its lessons cost nothing, Duolingo is able to entice consumers to try its services, enabling it to build a substantial user base over the years. At the end of Q2, Duolingo's number of daily active users (DAUs) hit 34.1 million, a 59% increase from 2023.
Like many online businesses, the company generates income by displaying ads to its massive user base. However, the bulk of its revenue comes from subscribers, another key to its success. Duolingo uses a freemium pricing strategy by which users can choose to go ad-free by paying a subscription fee.
In Q2, eight-million users opted for a subscription. Although this number is a fraction of Duolingo's audience, subscribers contributed $143.9 million of the company's $178.3 million in Q2 revenue.
Duolingo's strategies to drive growth
Clearly, subscription revenue is critical to the company's success, so Duolingo has plans to keep that subscription income growing. One key tactic is the introduction of a higher-priced subscription tier called Duolingo Max.
What makes this Max tier an appealing option is its use of artificial intelligence. This tier leverages unique AI-powered features, including the ability to practice conversations in the language you're learning with Duolingo's AI.
The Max tier was released in a limited number of English-speaking countries in 2023, and after proving successful, it's now being rolled out more broadly. At the end of Q2, Max's availability was up to 27 countries and covered 15% of DAUs.
Duolingo expects Max to be available in most countries by the end of the year. The firm hasn't shared revenue from Max, but according to CEO Luis von Ahn, as a result of the broader rollout, "This will set us up to see the impact of Max more fully in 2025."
Along with its Max tier, Duolingo plans to grow revenue by continuing to increase DAUs. The firm is implementing new social-oriented product attributes to keep consumers coming back.
One example is a "friend streak" feature, which encourages friends to see how many days they can keep each other practicing on Duolingo. These types of enhancements helped the company grow DAUs by 59% year over year in the second quarter.
The company also developed a successful marketing playbook that leverages social media, brand partnerships, and other tactics to attract users. This playbook was tested in Japan and contributed to increasing the country's Q2 DAUs by 93% compared to the prior year. Duolingo is now replicating the approach in other countries.
To buy or not to buy Duolingo stock
The success of Duolingo's strategies is seen in its ability to grow sales by double digits annually since going public in 2021.
Data by YCharts.
The company expects its sales to continue this growth trajectory in Q3. Duolingo management is forecasting Q3 revenue to reach at least $186.7 million, representing a double-digit increase compared to 2023's $137.6 million.
This top-line growth, in turn, enabled Duolingo to deliver strong financials. Q2 net income expanded to $24.4 million from $3.7 million in the previous year. Its Q2 free cash flow increased 60% year over year to $54.9 million.
In addition, Duolingo's Q2 balance sheet was outstanding. Its assets totaled $1.1 billion versus total liabilities of $372.5 million. And of those liabilities, $291.5 million represented deferred revenue, which will eventually be recognized as income.
Given the company's strong Q2 results, it's no wonder the consensus among Wall Street analysts is an overweight rating with a median-price target of $240.50 for Duolingo shares. This indicates Wall Street's belief Duolingo stock possesses upside.
With its new AI-based Max subscription and strategies to grow DAUs positioning the company for further revenue growth, and given its outstanding financial health, Duolingo is an attractive long-term investment.
Since its share price is hovering around $200 at the time of this writing, for now, it's worth keeping the stock on your watchlist and waiting for a price dip before buying shares.
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Robert Izquierdo has positions in Duolingo. The Motley Fool has positions in and recommends Duolingo. The Motley Fool has a disclosure policy.
