Each night, I’m reminded by an enormous inexperienced owl to do my day by day Spanish lesson. The guilt-trip works, as I’m quickly clicking on the Duolingo (NASDAQ: DUOL) app to apply. The teachings are partaking and I believe the agency is on to one thing highly effective. A lot so, I lately opened a small starter place in my Shares and Shares ISA.

¡Hola, Duolingo!

The app was launched in 2012 with the intention of democratising language studying, making it accessible to anybody, anyplace. The founders are each pc scientists with backgrounds in AI.

As we speak, the corporate affords 40+ languages to greater than 113m month-to-month lively customers worldwide. It operates an ad-supported freemium mannequin, with paid subscription choices.

Duolingo’s secret sauce is its capability to maintain college students motivated, which I can attest to with my very own 124-day streak! It does this by way of gamified reward methods and playful cartoon characters, remodeling grammar classes (yawn) into one thing enjoyable.

However this isn’t a trivial app for kids. Powering the platform is synthetic intelligence (AI) that personalises the educational expertise to ship superior outcomes and improved person engagement.

For instance, the agency makes use of machine studying fashions to adapt classes in response to a person’s strengths and weaknesses. It might then tweak issue ranges based mostly on this information.

40% development…¡increíble!

Development could be very sturdy. In Q3, income surged 40% yr on yr to $193m. Paid subscribers hit 8.6m, up 47%, whereas day by day lively customers (DAUs) grew 54% to 37.2m. 

Duolingo is investing for development, so isn’t but optimised for optimum earnings. But it nonetheless achieved web revenue of $23.4m and free money move of $52.7m within the quarter. This means the digital platform might be enormously worthwhile because it matures, assuming development doesn’t stall or one thing higher comes alongside, that are dangers for any high-growth firm.

Co-founder and CEO Luis von Ahn commented: “We performed superbly across all of our key operating metrics this quarter, with DAU and bookings growth exceeding our expectations.”

The explanation I’ve solely taken a small starter place right here is as a result of excessive valuation. After doubling in simply six months, the inventory is buying and selling at a price-to-sales a number of of 21, based mostly on 2024’s forecast income. That doesn’t current a lot wiggle room if, once more, development unexpectedly slows in 2025.

AI-powered

Nonetheless, I’m backing the corporate to proceed increasing, boosted by a brand new greater subscription tier (Duolingo Max) that it’s rolling out.

This has highly effective AI options, together with one that permits learners to have spontaneous video-call conversations with Lily, a sassy, purple-haired goth avatar with a signature deadpan manner. She even popped up on the Q3 earnings name!

My younger daughter, who additionally loves Duolingo, likes to imitate Lily, sarcastically rolling her eyes and clapping slowly in mock enthusiasm to varied issues. 

Large market alternative

There are an estimated 2bn individuals around the globe actively studying a overseas language. Duolingo, which is shortly changing into synonymous with language studying in standard tradition, solely had 8.6m paid subscribers in Q3. So the expansion alternative seems huge.

Duolingo additionally affords maths and music programs, with a long-term aim to show numerous topics. Certainly, it goals to rival — and even surpass — human tutors.

After all, it’d by no means obtain that ambition. But when it does at some point, the enterprise might be value a hell of much more than $16bn.