If you want to learn a new language, chances are you will meet Duolingo‘s(NASDAQ: DUOL) application. It has been downloaded over 500 million times, is loved by people around the world, and is led by a founder whose inspiring mission is to “develop the best education in the world and make it universally available”. In other words, it can be completely free.
This is great for users, but how can this make Duolingo a worthwhile investment?
In this September 9 video from the YouTube channel of Motley Fool contributors Brian Stoffel and Brian Feroldi, learn about the three revenue streams this company has developed and see how the company performs on each of its investment frameworks.
Brian Feroldi: Is Duolingo a good investment? Let’s take a look at the bullish and bearish case of this business to find out. My name is Brian Feroldi.
Brian Stoffel: My name is Brian Stoffel.
Brian Feroldi: Brian, for those who don’t know, what does Duolingo do?
Brian Stoffel: Duolingo is a very popular app which you can use mainly to learn any language. They have a ton of different languages, and there are millions of people who have downloaded this app to learn a second language.
Brian Feroldi: It’s an incredibly popular app and it monetizes its users in three main ways. The first is through advertisements. This company has millions of free users and monetizes them through ad placements. The second way they are monetized is through subscription services. Its goal is to convert these free users into paid users and these subscribed users currently generate the vast majority of the revenue for this business. The third way is through evaluation tests. This company has a $ 49 English Proficiency Test which is actually acceptable at some universities in the United States. It earns a small amount of money by charging for these tests.
Brian Stoffel: What are the dynamics of the company’s growth curve? As you can see, their number of active users is growing quite rapidly, up to around 37 million in the last quarter, but the number of paying users is much smaller than it is now, 96% is not. , but four percent are. Mostly, you can regard it as a bad thing or a good thing. I saw this as a huge opportunity. They’ve only monetized four percent of that 37 million, if they can reach six percent, and the number of users continues to grow, then the amount of revenue the business is raising could increase dramatically.
Brian Feroldi: What is the case with bull for this business in the future? First of all, this is a mission driven company with a wonderful founder, a CEO who owns a lot of shares. The founder here is an incredibly impressive person who was also the founder of CAPTCHA and reCAPTCHA, which I guarantee is a tool that anyone who watches this video has used on the internet before. Second, the name Duolingo has become synonymous with language learning. In fact, the term Duolingo is searched over nine times more on Google than the term “learn Spanish”. What else? It’s an incredible value proposition for potential learners. It’s free to download and use. It is convincing. Third, the opportunity for this company is absolutely huge. Not only are there tens or hundreds of millions of people who want to learn a second language, but this business is focused on education, not just language. He intends to switch to different categories of education over time which could open up new huge income opportunities.
Brian Stoffel: Yes, when they came out in public they really said it was more than just learning languages, but as positive as that may be we need to keep an eye on the bear case as well. First and foremost, how strong is the moat? In the company’s flyer, they called the network effect as their main gap, claiming that the more users they have and the more cheap they have, because it’s such a popular brand, the more they can invest money in R&D. , which makes their language learning tools much more effective compared to other possible tools. Is it true? It’s hard to know. We will have to wait and see. Second, as you said Brian, they are synonymous with language learning. It might hurt them in their decision to get out of just language learning, they have an early literacy tool, but if they can’t get beyond other educational topics it would severely limit their chances. Third, the churn rate is very high. This app has been downloaded over 500 million times, but currently only has less than 40 million active users. The reason is probably quite simple, is that once you learn a language, you have no incentive to keep paying or continue using this tool. We have to see them prove that it can be a sticky product over time.
Brian Feroldi: How does this company rank on our checklists? We’ll let you know, but before that we want to thank the Motley Fool. The Motley Fool is where Brian and I first met and we have both paid members of their flagship Stock Advisor service for years. If you want to experience Motley Fool’s flagship service, you get a 50% discount. Proceed to checkout, crazy.com/feroldi, or click the link you see on the screen.
Brian, how did Duolingo score on our checklists? For me, this company got a 71, which is already in my investment category. This is especially noteworthy because my checklist punishes companies that haven’t been public for a year yet. At the time of this recording, this company has only been public for a few months, there is ample room for this score to improve over time.
Brian Stoffel: Mine it got to 10 it got to 10 because I love the way the mission is mission driven, there are tons of skin in the game. I will say when we hiked this for the hour-long episode, for The Motley Fool, I gave it an even higher score. After careful consideration, I associate the amount of the moat score that I gave to the company. But at the end of the day what I really need to see is that this company can figure out how to hang on to users and convert them to paid users if they can, it will be a great investment.
Brian Feroldi: Yes I agree. What should investors watch out for for the future of this business? Well, the first thing is to be able to grow your paid user base. That’s the lion’s share of this business’s revenue both now and in the future. In order for this business to function, it will need to continue to develop this paid user. Second, will this option in other subjects actually materialize? Yes, he said that again to different product categories and he has already launched a new product category, but can he successfully launch them and can he convince people to pay for them. She’s an unknown at this point. Finally, it’s churning. As you said, this company, this product has been downloaded over 500 million times. It only has around 35 million active users. This means that the vast majority of people who downloaded this app no ââlonger use it. Because they don’t lend it out or use it, that doesn’t mean they’re gone forever. They could come back and they could become converted customers on time, but the churn rate is definitely something investors need to watch out for here. Overall, I think we think there is a lot to like about Duolingo. However, this is by no means a perfect investment.
Brian Stoffel: No it is not. What I like is so hard to compete with them. They’re offering it for free and that’s part of their mission, but they have to prove that you can offer it for free while still being a sustainable business model, and that’s what we have yet to see.
Brian Feroldi: Overall, I think there is more to like here than not to like here. It will be a fun business to watch. Thanks for watching this video, we hope you enjoyed it. My name is Brian Feroldi and my mission is to spread financial well-being.
Brian Stoffel: My name is Brian Stoffel. My mission is to publish the rules of finance so that everyone can see them.
Brian Feroldi: Brian outside.
This article represents the opinion of the author, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.