The highly competitive online language learning industry, with its low switching costs and constant influx of new products and entrants, presents a significant threat to Duolingo, Inc. (DUOL). Despite offering courses in 40 languages and operating as a global mobile learning platform, DUOL seems to fail to appeal to investors due to its deteriorating fundamentals and gloomy outlook. Let’s discuss why.

As outlined in its latest annual report, the language-leaning company DUOL stands at various risks that might hinder its ability to achieve business objectives and negatively impact its financial performance. It has incurred substantial operating losses each year since its inception in 2011 and does not assure achieving or sustaining profitability in the future.

As DUOL invests in sales and marketing; and product and service development, operating expenses might continue to rise. These expenses could be higher than anticipated, making it challenging to offset them with revenue growth. The company’s total operating expenses increased 38.8% year-over-year to $335.26 million for the year that ended December 31, 2022.

In addition, DUOL’s full-year net loss and loss per share stood at $59.57 million and $1.51, respectively. Also, the company is dealing with high levels of debt. As of December 31, 2022, its total liabilities came in at $205.27 million, compared to $148.26 million as of December 31, 2021.

DUOL’s products and services might also be viewed as discretionary purchases by consumers. The business’ sensitivity to current economic cycles and fluctuations in consumer demand for its offerings due to global economic uncertainty could significantly harm its business, financial condition, and results of operations.

Shares of DUOL have slumped 2.5% over the past five days to close the last trading session at $134.70.

Let’s delve deeper into the factors that make DUOL a risky investment option.

Deteriorating Financials

DUOL’s total operating expenses increased 33.7% year-over-year to $94.21 million in the fourth quarter that ended December 31, 2022. Its loss from operations widened by 4.2% year-over-year to $18.15 million. Also, the company reported a net loss and loss per share of $13.93 million and $0.35, respectively.

Furthermore, as of December 31, 2022, the company’s current liabilities came in at $181.78 million, compared to $119.13 million as of December 31, 2021. For the year that ended December 31, 2022, cash outflows from investing activities were $14.17 million, up 128.4% year-over-year.

Unfavorable Analyst Estimates

Analysts expect DUOL to report a loss per share of $0.24 for the first quarter that ended March 2023. For the current quarter ending June 2023, the company is expected to report a loss per share of $0.25. In addition, DUOL’s loss per share for fiscal years 2023 and 2024 is expected to come in at $0.88 and $0.30, respectively.

Poor Profitability

DUOL’s trailing-12-month EBITDA margin of negative 16.72% compares to the industry average of 11.43%. Its trailing-12-month net income margin of negative 16.12% compares to the 4.56% industry average. Also, the stock’s trailing-12-month CAPEX/Sales of 1.51% are 53.2% lower than the 3.21% industry average.

Additionally, DUOL’s trailing-12-month ROCE, ROTC, and ROTA of negative 11.29%, 7.27%, and 7.97% compare to the respective industry averages of 11.79%, 6.34%, and 3.92%. Moreover, its trailing-12-month asset turnover ratio of 0.52x is 49.2% lower than the 1.03x industry average.

Stretched Valuation

In terms of forward non-GAAP P/E, DUOL is trading at 113.51x, 719.5% higher than the industry average of 13.85x. The stock’s forward EV/Sales of 9.93x is 817.4% higher than the industry average of 1.08x. Also, its forward EV/EBITDA of 91.62x compares with the 9.35x industry average.

Furthermore, DUOL’s forward Price/Sales multiple of 11.10 compares with the industry average of 0.83. The stock’s forward Price/Cash Flow of 91.66x is 965.9% higher than the 8.60x industry average.

POWR Ratings Reflect Bleak Prospects

DUOL’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall rating of D, translating to Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. DUOL has a D grade for Value, consistent with its higher-than-industry valuation. Also, the stock has a D for Stability, in sync with its 24-month beta of 1.01. 

DUOL is ranked #95 in the D-rated 134-stock Software – Application industry.

Click here to access the additional Growth, Quality, Sentiment, and Momentum grades for DUOL.

View all the stocks in the Software – Application industry here.

Bottom Line

Language learning app maker DUOL is encountering difficulties in attaining its business objectives and sustaining financial performance due to increasing expenses, mounting operating losses, and growing debt, which are influenced by economic cycles and volatile consumer demand. This is evident from the company’s disappointing results in the fourth quarter and fiscal year 2022.

Furthermore, analysts expect the company to incur bottom-line losses for at least two fiscal years. Considering DUOL’s weak financials, unimpressive growth prospects, low profitability, and high valuation, it could be wise to steer clear of this popular language app stock now.

Stocks to Consider Instead of Duolingo, Inc. (DUOL)

Unfortunately, the likelihood of DUOL outperforming in the upcoming weeks and months ahead is significantly compromised. Nonetheless, there are several stocks in the Software – Application industry with impressive POWR Ratings. So, consider these three A-rated (Strong Buy) stocks instead:

Commvault Systems, Inc. (CVLT)

IBEX Ltd. (IBEX)

eGain Corporation (EGAN)

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DUOL shares were trading at $135.18 per share on Tuesday morning, up $0.48 (+0.36%). Year-to-date, DUOL has gained 90.05%, versus a 7.59% rise in the benchmark S&P 500 index during the same period.

About the Author: Aanchal Sugandh

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns. More...

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