Why Is Everyone Talking About Duolingo Stock?

Duolingo's (NASDAQ: DUOL) stock is on a winning streak, delivering market-beating returns to investors for two consecutive years.

The education app's solid execution and prospects have captured investors' attention. This article will delve deeper into the company, highlighting some key aspects investors should know about this up-and-coming tech company.

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Bringing the best education to everyone, everywhere

Duolingo is an excellent example of a noble vision enabled by the ongoing development of the technology industry.

Founded by two engineers, Duolingo aims to democratize high-quality education, ensuring that everyone (regardless of their economic and cultural backgrounds) can conveniently access education to better their lives. Leveraging smartphones, the tech company developed a bite-sized, on-demand, and engaging app to help anyone learn new languages.

Duolingo's focus on teaching languages has practical reasons. First and foremost, job seekers can earn higher salaries than their peers with average English ability by mastering specific languages like English. Beyond that, learning new languages can help build new experiences and human connections. For instance, an American-born Asian can communicate better with older family members back in his native country by picking up his native tongue.

Besides making language learning easily accessible via smartphones, Duolingo offers its product free of charge, teaching 40 languages to 113 million monthly active users (MAU). The only cost to users is to watch an advertisement after the end of an exercise. Learners can also subscribe to premium services -- Super Duolingo and Duolingo Max -- to remove the ads and access premium features.

Also, Duolingo ensures that the learning experience on its app is fun and engaging, more like a game than boring language classes, to motivate users to keep coming back for more. The tech company also leverages artificial intelligence (AI) to offer personalized learning experiences to deliver superior learning outcomes.

Doing good is financially rewarding

Unlike most companies, Duolingo did not start with a single-minded pursuit of profits but rather with the goal of making high-quality education accessible to everyone. Still, that did not stop the company from building a profitable business model around it.

In the third quarter of 2024, Duolingo generated $193 million in revenue, $140 million in gross profit, and $56 million in operating cash flow. Of this revenue, 82% was from paid subscriptions, and the rest was from non-subscription revenue, such as advertising.

Besides being profitable, Duolingo is also growing rapidly, with revenue increasing by 40% in the latest quarter due to a 45% jump in subscription bookings. In short, the tech company is a rare example of a high-growth company that's also enormously profitable.

A sea of opportunity

Duolingo's success could soon propel it to join the billion-dollar-revenue club of tech companies. Yet there's a good argument that the company has only scratched the surface of the tremendous opportunity ahead.

To start, Duolingo has plenty of opportunities to grow its user base of 113 million, especially considering that the company's app is available almost anywhere globally. With the potential to reach billions of users, Duolingo's existing user base is just a drop in the ocean.

Secondly, only 8.6 million of the 113 million users are paid subscribers. Even if Duolingo increases its paid user base by 10 times its current size, it will still have unconverted users. To this end, the tech company's ongoing product enhancement -- adding new subjects and features and improving engagement and learning outcomes -- will motivate users to pay for premium services.

For instance, the company introduced the Video Call feature for its Duolingo Max, which allows users to practice conversation skills with Lily, an AI agent who remembers past interactions. This feature will help learners practice their conversational skills, which will likely improve the learning outcome.

To put the opportunity into numbers, Duolingo estimated that the digital learning industry will hit $1 trillion in 2026, of which the online language industry could reach $47 billion by 2025. In short, there's a sea of opportunity ahead!

What it means for investors

With a combination of growth, profits, and untapped potential, Duolingo is a leading investment candidate, especially for investors seeking exposure to a high-growth, mission-driven company with strong financial fundamentals.

The key is for the company to continue improving its product offerings and growing its user base in the coming years. If it can do so, it stands a good chance of expanding its market share in the booming edtech industry.

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Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool recommends Duolingo. The Motley Fool has a disclosure policy.