Robinhood Markets (HOOD) just went public, and despite being the hot topic, it was met with an underwhelming response from investors, dropping 8% on its first day. But just 24 hours earlier another technology company hit the markets with a 36% day-one pop, and it could be a rewarding long-term buy.
The education business is at the precipice of major disruption. Remember when you had to attend classes to learn useful skills? Technology has changed all of that by transforming our smart devices into portable wells of knowledge. Even traditional schools are embracing the revolution.
The language education segment is one of the most popular globally, with an estimated 1.8 billion people participating. It's something many people learn in their spare time, but in the past, it was rather difficult without in-person classes. But it's 2021, and Duolingo Inc (DUOL 5.34%) has leveraged the power of smartphones to deliver a fun, quirky, and thorough way to learn over 40 languages -- and it's growing like a weed.
Image Source: Getty Images
The Duolingo difference
For anyone who hasn't used the app, it makes a game out of your educational experience. After selecting a language, it breaks the curriculum into a handful of units, and under each unit is a series of specific modules. It takes a ''learn by doing'' approach -- no boring videos or listening sessions. You're able to translate content (with hints) almost immediately through text and voice.
It starts with the basics, teaching the structural foundations of the language the user is trying to learn. Then it flows seamlessly into specialized modules like food, animals, and even flirting. Naturally, content becomes more advanced as users progress through the more boring topics, like politics.
Users earn experience points for each lesson they complete (which usually runs for less than 10 minutes, depending on the person's proficiency). Those points determine the user's place on the leaderboard, where the top players each week advance to higher tiers.
Duolingo runs a freemium business model. The free version of the app is perfectly sufficient for the casual learner, but if pesky ads are a deal-breaker, there's a paid version available for $12.99 per month, or a discounted $79.99 annually.
Over 3,000 higher-education programs around the world accept Duolingo English test results as proof of proficiency for international student submissions -- so it holds as much weight as some incredibly expensive formal courses.
It's growing rapidly
Duolingo has over 500 million downloads worldwide, and it's the highest-grossing app in the Education category in both the Apple (AAPL -0.57%) App Store and Alphabet's (GOOG 0.37%) (GOOGL 0.35%) Google Play store.
In the first quarter of 2021, almost 40 million of its users were active each month, and 5% of those were paid subscribers.
|
Metric |
Q1 2020 |
Q1 2021 |
Growth |
|---|---|---|---|
|
Monthly active users |
33.5 million |
39.9 million |
19% |
|
Paid subscribers |
1.1 million |
1.8 million |
63% |
|
Revenue |
$28.1 million |
$55.3 million |
96% |
DATA SOURCE: COMPANY FILINGS.
The company isn't profitable just yet, but with revenue growing at this pace, it's wise to build more scale before reducing costs and generating positive earnings. For the 2020 full year, the company grew revenue by 128%, which is a big number to beat this year, but the first-quarter result was incredibly robust.
Duolingo more than doubled its research and development expense in Q1 year over year, as it invests in technology to expand its offerings. More notably, it almost quadrupled its sales and marketing expense, which is important because user growth is a key driver for technology companies. It's all about pulling in users who can be monetized in the future.
Since most of the company's revenues are derived through smartphone apps, and therefore subject to fees as high as 30%, it could benefit from the growing resistance to Apple's and Google's approach. In 2020, Duolingo's cost of revenue was $45.9 million -- out of $161 million in total revenue -- which is mostly attributable to those app-store fees. If fees eventually come down, the company will realize a strong tailwind.
Why you should own it
Duolingo has such a comprehensive product that it has built its own moat, making it really hard for competitors to come in and knock them off the top spot. It operates in an area that probably isn't getting a great deal of attention from high-powered developers.
It's rare to find a technology company with such an incredible advantage in its given marketplace. Robinhood is definitely one of them, but it blazed its trail through practices that have been under intense regulatory scrutiny -- it even paid a $65 million settlement with the Securities and Exchange Commission back in December -- and that could pose a significant risk to investors.
Duolingo stands ready to cause as much disruption as possible to the existing $61 billion online and offline language education segment -- especially considering the opportunity is expected to nearly double to $115 billion by the year 2025.
In this stock, investors get an early stage technology play at the top of its game. It offers triple-digit yearly revenue growth and isn't far off from profitability. With a time horizon of five or more years, this could even become one of the top performers in your portfolio. Of last week's IPO crop, Duolingo looks the best bet.
