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Duolingo Q4 Earnings: Wait For A Pullback

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Investment Thesis

Duolingo (NASDAQ:DUOL) went nationalist backmost successful 2021 but nan institution has been performing severely owed to rising rates and ostentation worries. However, it has travel live successful nan past fewer months pinch shares up astir 100% from its December low. The company’s gamified learning strategy is seeing monolithic occurrence and nan motorboat of Duolingo Max later this twelvemonth could beryllium a beardown maturation driver. Its Q4 net results were superb pinch beardown top-line maturation and a importantly improved bottommost line. However, nan existent valuation looks beautiful elevated aft nan rally, pinch multiples supra high-growth peers. I deliberation nan upside present should beryllium comparatively muted truthful I complaint it arsenic a hold.

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Growth Opportunity

Duolingo is simply a US-based acquisition exertion institution founded backmost successful 2012. The institution offers complete 100 connection courses done gamified learning experiences. It has been gaining beardown traction successful nan past fewer years and now has complete 60 cardinal monthly progressive users. The institution generates astir of its gross done subscriptions via Super Duolingo, a premium paid merchandise utilized by 4.7 cardinal users. It besides makes money done different insignificant segments specified arsenic advertizing and its connection tests.

Super Duolingo is presently nan only paid subscription tier and nan institution is readying to merchandise a higher paid tier called Duolingo Max this year, which should beryllium a beardown maturation driver. Super Duolingo is not excessively differentiated compared to nan free version, too it has nary ads and connection unlimited playing opportunities. Duolingo Max offers a immense measurement up successful features which should pull galore users to upgrade. The institution is moving pinch OpenAI to incorporated generative AI into its caller features. The first 1 is called Explain My Answer, which done AI provides users pinch elaborate explanations of their mistakes. The 2nd is called Roleplay, which allows users to chat pinch an interactive characteristic and believe their conversational skills. I judge Duolingo Max will beryllium a occurrence and could importantly boost growth.

Duolingo

Duolingo

Q4 Earnings

Duolingo announced its fourth-quarter earnings past week and nan results are superb arsenic maturation remains beardown while profitability improved.

The institution reported gross of $103.8 million, up 42% YoY (year complete year) compared to $73 million. Subscription gross accrued 53% YoY from $51.1 cardinal to $78.1 million, now accounting for 75.2% of full revenue. Advertising gross was level YoY astatine $11.1 million. Revenue maturation is chiefly driven by nan summation successful paid subscribers, which grew 67% from 2.5 cardinal to 4.7 million. Monthly progressive users accrued by 43% to 60.7 cardinal while regular progressive users accrued by 62% to 16.3 million, which indicates improved engagement from users. Gross profit was $76.1 cardinal compared to $53.1 million, up 43.3% YoY. The gross profit separator besides expanded 600 ground points YoY from 72.7% to 73.3%.

The institution is starting to show immoderate operating leverage. Despite gross being up complete 40%, operating expenses only accrued 33.6% from $70.5 cardinal to $94.2 million. Most of nan summation is attributed to R&D (research and development) expenses, which grew by 48.3% to $44.5 cardinal arsenic nan institution prepares for Duolingo Max. The slower summation successful spending resulted successful adjusted EBITDA exploding from $0.3 cardinal to $5.2 million. The adjusted EBITDA separator was 5%. Net nonaccomplishment besides contracted by 20.6% from $(17.5) cardinal to $(13.9) million. EPS was $(0.35) compared to $(0.46), up 23.9%.

The institution besides initiated upbeat guidance for FY23. It expects gross to beryllium $486 cardinal to $498 million, which translates to gross maturation of 32% to 35%. Adjusted EBITDA is expected to beryllium $48.6 cardinal to $59.8 million, representing an adjusted EBITDA separator of 10% to 12%. The separator is what impressed maine nan astir arsenic it indicates important betterment successful profitability.

Investors Takeaway

I for illustration Duolingo’s gamified learning strategy and nan upcoming motorboat of Duolingo Max should boost nan number of paid users and thrust growth. The latest net proceed to show beardown momentum pinch superb top-line maturation while nan bottommost statement besides starts to scale.

However, its existent valuation is simply a problem. The institution is trading astatine a lofty fwd EV/EBITDA of 79.7x, which is meaningfully supra different high-growth companies pinch akin maturation rates. For instance, CrowdStrike (CRWD), Zscaler (ZS), and Adyen (OTCPK:ADYEY) person an fwd EV/EBITDA of 63.7x, 61.6x, and 42.9x respectively while posting amended margins. I deliberation Duolingo will proceed to execute good financially but its valuation will apt limit nan upside potential. Therefore I complaint nan institution arsenic a clasp and will hold for a pullback.

This article was written by

Felix Fung floor plan picture

I americium a student presently studying sociology and economics astatine nan University of New South Wales. I conscionable started penning and I admit immoderate type of feedbacks and comments.

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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