Earnings season for the quarter that ended in September is now underway, and it's off to a strong start. According to Forbes, 79% of the S&P 500(SNPINDEX: ^GSPC) companies that have reported so far have beaten expectations.
Tech companies Duolingo(NASDAQ: DUOL) and Bill.com(NYSE: BILL) are scheduled to report their latest results on Nov. 6 and Nov. 7, respectively, and they each have a track record of consistently beating their own forecasts.
Although investors should never base their decisions on a company's performance during a single quarter, here's why buying shares in Duolingo and Bill.com before the release of their upcoming results could turn out to be an ideal long-term entry point.
1. Duolingo
Duolingo is the biggest digital language education platform in the world. Its mobile app delivers an interactive and gamified learning experience for practically anybody with a smartphone. As of the second quarter of 2024 (ended June 30), Duolingo had a record 103.6 million monthly active users (MAU), a 40% increase from the year-ago period.
During that same quarter, Duolingo generated $178.3 million in revenue, which represented 41% growth. It was also above the company's guidance range of $175 million to $177.5 million. That prompted management to raise its full-year revenue forecast to $738.3 million at the high end of the range -- marking the second guidance increase this year alone. I think another strong result is ahead for the upcoming third-quarter report, thanks in part to artificial intelligence (AI).
Most people use Duolingo for free, but 8.6% of its MAU pay a monthly subscription to unlock additional features and accelerate their learning. That number is consistently growing, but it could get a boost thanks to the Duolingo Max subscription, which introduces two new AI-powered features. Explain My Answer provides each user with personalized feedback based on their mistakes in each lesson, and Roleplay uses an AI chatbot interface to help users practice their conversational skills.
The Max subscription was released in 2023, but it's only available to 15% of Duolingo's users in 27 countries so far. It will continue to roll out over time, and since it's the most expensive plan on the platform, it could significantly boost the company's revenue. Duolingo believes AI is the secret to creating a learning experience that can rival a human tutor, and features like Explain My Answer and Roleplay are a major step in that direction.
Duolingo's Q3 revenue is expected to come in between $186.7 million and $189.7 million, so that's the range to beat. However, investors should also keep an eye on the company's profitability, which has grown significantly in recent quarters (including by 554% year over year during Q2). Duolingo is carefully managing its expenses, and its surging bottom line is a sign the company doesn't have to burn truckloads of cash to generate revenue growth.
Duolingo's valuation is one thing to be wary of. Its stock is trading at an all-time high, and its price-to-sales (P/S) ratio currently stands at 20.9, which is well above its average of 14.8 since its IPO in 2021. However, if the company continues growing its revenue at around its current pace, its stock won't look expensive for long. Investors who buy it with a long-term outlook of five years or more could do very well.
Image source: Getty Images.
2. Bill.com
Bill.com is a software provider to small and mid-sized businesses (SMBs). Its products help to streamline the accounts payable, accounts receivable, and expense management workflows to save business owners time and money.
Bill.com wrapped up its fiscal 2024 on June 30, and it beat its revenue guidance in every single quarter throughout the year. I think that trend will continue when the company reports its results for the first quarter of fiscal 2025 on Nov. 7, because it has barely scratched the surface of its long-term opportunity in the SMB payments software space.
Bill.com's flagship product is a cloud-based digital inbox that collects incoming invoices, where they're automatically routed to the designated person for approval, and can be paid with a single click. Thanks to integrations with most leading accounting software platforms, each transaction is instantly logged in the books.
Bill.com developed an accounts receivable product after acquiring Invoice2go in 2021. It allows businesses to rapidly create and send invoices to clients, and helps them track incoming payments. Bill.com also acquired Divvy in 2021, which is at the foundation of its expense management tool. It tracks and categorizes employee spending. This saves businesses dozens of hours per month because managers spend less time chasing down receipts.
As of the fiscal 2024 fourth quarter, Bill.com was serving 474,600 business customers. However, the company believes there are more than 70 million SMBs in its addressable market worldwide, so it has a long growth runway. Its strategy is to acquire them, both directly and also through its partnerships with over 8,000 accounting firms. They recommend Bill.com's software to their clients because it makes their job easier, which in turn saves each business money.
Bill.com generates most of its revenue by charging fees each time a customer makes a payment using its platform. The company has processed more than $1 trillion worth of transactions since 2018, but that's a drop in the bucket compared to the whopping $125 trillion in business-to-business payment volume worldwide each year.
Unlike Duolingo, Bill.com stock is trading 83% below its all-time high. Its P/S ratio of 4.6 is also near the cheapest level since the company came public in 2019, and way below its peak of above 90 (which was unsustainable). Bill.com's revenue growth is gradually slowing down as the company matures, because management is spending money less aggressively so it can create a more sustainable business for the long term.
Given Bill.com's historically low valuation, the size of its opportunity, and the strong chance it will beat expectations on Nov. 7, this could be a great time to buy the stock.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bill Holdings and Duolingo. The Motley Fool has a disclosure policy.
