Duolingo (NASDAQ: DUOL) is the world's biggest digital language education platform. It takes a mobile-first approach, placing gamified and interactive lessons at the fingertips of millions of users worldwide.
The company operates using a freemium business model -- anyone can access its basic tools for free, but those who want to accelerate their learning can pay for a monthly subscription and unlock additional features.
As of the end of the second quarter, Duolingo had a record-high 103.6 million monthly active users -- up 40% from a year earlier. Plus, the number paying for monthly subscriptions grew 52% to an all-time high of 8.0 million.
That means 8.6% of its monthly active users are now paying for subscriptions, and since the paying user base has consistently grown faster than the total user base, that percentage is gradually climbing.
The company monetizes its free users by selling advertising, but that accounts for only a small fraction of its total revenue. Subscriptions bring in the most money, so the rapid increase in paid penetration is driving significant financial growth for the company.
In Q2, Duolingo's revenue soared 41% to $178.3 million, above management's prior guidance. As a result, the company raised its full-year revenue forecast to a range of $731.3 million to $738.3 million, up from its prior forecast range of $726.5 million to $735.5 million.
But things could get even better. Last year, Duolingo launched its Max subscription, which introduced two new features powered by artificial intelligence (AI). Explain My Answer offers personalized feedback to users based on their mistakes in each lesson, and Roleplay is a chatbot-style assistant that helps users practice their conversational skills in the foreign language of their choice.
Duolingo Max was only available to 15% of the platform's users in 27 countries during Q2, but it's gradually being rolled out more widely. Since it's priced higher than Duolingo's other subscriptions, it could be a significant revenue driver in the future.
AI will help Duolingo achieve its goal of delivering a learning experience that rivals being guided by a human tutor, and Max is an important first step that could boost the company's paid penetration even further in the coming quarters.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Duolingo. The Motley Fool has a disclosure policy.
