This firm built-in synthetic intelligence into its core enterprise, and it is already efficiently monetizing the expertise.
Artificial intelligence (AI) is a red-hot theme in the inventory market proper now, and whereas there’s a ton of hype, many firms are discovering tangible and extremely beneficial use instances for the expertise.
Duolingo (DUOL 4.69%) is the world’s largest digital language training platform, and its enterprise was an unimaginable success earlier than AI got here alongside. Nonetheless, the firm is utilizing it to create thrilling new options for its customers, and it is resulting in new income streams.
The inventory is down 29% from the all-time excessive it set earlier this yr. Here is why that presents a terrific alternative for traders to purchase in.
Picture supply: Getty Pictures.
Utilizing AI to reinforce language studying
Duolingo is a mobile-first platform, so it locations language classes at the fingertips of virtually anyone with a smartphone. Its classes are gamified and interactive, which is a departure from conventional classroom-based studying.
Throughout the second quarter of 2024, the platform had 103.6 million month-to-month energetic customers, which was up 40% from the year-ago interval. That progress fee represents an acceleration from the first quarter when its person base grew 35%, which actually highlights Duolingo’s optimistic momentum.
The variety of customers paying a month-to-month subscription to unlock further options rose 52% yr over yr to eight.0 million. That already spectacular progress tempo might rise going ahead because of Duolingo Max, the firm’s latest (and most costly) subscription tier.
Max affords two AI-powered options: Clarify My Reply, which gives every person with customized suggestions primarily based on their errors, and Roleplay, which permits customers to observe their conversational expertise with a chatbot in the language of their selection. Duolingo has been working on AI for a number of years, however these new options run on OpenAI‘s highly effective GPT-4 fashions, which allowed the firm to launch them extra rapidly.
Duolingo Max launched final yr, and it is solely obtainable to round 15% of energetic customers in 27 international locations to date. Nonetheless, it is an necessary step in the firm’s mission to ship a studying expertise able to rivaling a human tutor. Duolingo will steadily roll out Max to extra customers over time, and the firm says it is going to reveal new details about the product at its Duocon convention subsequent month.
Duolingo’s income and revenue proceed to develop quickly
Second-quarter income climbed 41% to $178.3 million final quarter, exceeding the excessive finish of administration’s forecast ($177.5 million). The sturdy end result prompted administration to extend its full-year income steering by $2.8 million at the excessive finish of the vary, to $738.3 million.
Duolingo additionally reported important progress on the backside line. The corporate continues to fastidiously handle its prices, rising complete operating expenses simply 14.7% yr over yr. That contributed to net income‘s surge from $3.7 million to $24.4 million.
Merely put, Duolingo is proving to traders it does not should burn important quantities of money to keep up sturdy progress throughout its enterprise. Actually, not like many tech firms in the shopper area, Duolingo spends little or no cash on advertising and marketing. It was the firm’s smallest working expense throughout Q2 at $20.2 million, which represented simply 18% of its complete working prices.
In the previous, Duolingo advised traders that as much as 90% of its person acquisition is natural, which implies it comes by way of avenues like phrase of mouth and free social media posts. Throughout Q2, the firm mentioned its natural (unpaid) social media impressions soared 190% from the year-ago interval.
Why Duolingo inventory is a purchase on the dip
An estimated 2 billion persons are studying a overseas language worldwide, so Duolingo has an extended runway for progress primarily based on its present month-to-month energetic person base. Plus, if the firm achieves its mission to ship a digital studying expertise that rivals human tutors, it is going to provide an unprecedented worth proposition to college students, which could even immediate them to substitute their bodily classes for the Duolingo app.
AI can be the secret to delivering that have. Duolingo’s customers full over 1 billion workouts each single day, which gives the firm with mountains of beneficial information it might probably use to enhance its AI options, making them extra responsive and extra correct over time.
Duolingo inventory is at present buying and selling at a price-to-sales (P/S) ratio of 14.7, which is nearly precisely in step with its common because it went public in 2021. In different phrases, Duolingo inventory is neither low-cost nor costly proper now, at the very least relative to its historic valuation ranges.
Knowledge by YCharts.
Nonetheless, if the firm delivers $738.3 million in income throughout 2024 as anticipated, that provides its inventory a ahead P/S ratio of 11.0 (primarily based on the firm’s present market capitalization of round $8.2 billion). That means Duolingo inventory must rise over 30% between now and the finish of this yr simply to keep up its common P/S ratio of 14.6.
However traders who purchase the inventory at present ought to be focusing on the long run. The corporate is delivering blistering progress, regardless of the very restricted availability of its AI-powered Max subscription. Because it rolls out additional, Duolingo might ship extra document outcomes on the high and backside strains.