Popular language learning app Duolingo, Inc. (DUOL) made a stellar stock market debut on Nasdaq Stock Exchange on July 28. DUOL has approximately 40 million active users and 500 million downloads as the world’s most popular language-learning app. DUOL is based in Pittsburgh, Pa.

The company issued 3.70 million shares priced at $102 per share, which surpassed its initial $85-$95 price target. It raised $521 million through the IPO, indicating a $3.70 billion company valuation, which is 54.2% higher than its $2.40 billion private market valuation.

The stock opened at $141 on its first trading day, up 38.2% from its pre-listing price. In fact, DUOL gained 14.5% within the first week to hit its $152.84 all-time high on August 5.

Regarding its  stock market debut, DUOL’s co-founder and CEO Luis von Ahn said, “Being a public company will allow us to operate at a higher level and get going from the minor leagues to the major leagues.”

Click here to check out our Software Industry Report for 2021

Here’s what we think could shape DUOL’s performance in the near term:

Impressive Growth History

DUOL’s monthly active users increased 34% year-over-year to 37 million in its fiscal year 2020 ended December 31. It  had approximately 40 million monthly active users as of March 31, 2021, reflecting an 8.1% improvement. The company’s paying subscriber base grew 84% from the same period last year to 1.60 million in 2020. And its subscriber base rose 12.5% in its  fiscal first quarter to 1.80 million.

DUOL’s revenues have increased 129% from their year-ago value to $161.70 million in fiscal year 2020 and 97% period-over-period to $55.40 million in the quarter ended March 31. Its total bookings for the year ended December 2021 came in at $190.20 million, up 116% year-over-year. In addition, its quarterly bookings rose 78% from the prior-year quarter to $65.80 million in the period ended March 2021.

Stellar Report for the Most Recent Quarter

In its  fiscal second quarter, ended June 30, DUOL’s revenues increased 47% year-over-year to $58.80 million. This can be attributed to a 30% rise in total bookings and a 34% rise in subscription bookings. Its gross profit was  $42.70 million, up 51% from the same period last year.

However, the company’s net loss widened 340% from the prior-year quarter to $176,000. In addition, its monthly active users fell 3% from their year-ago value to 37.90 million.

Negative Profitability

DUOL is currently investing heavily in product innovation and data analytics, resulting in low shareholder returns. The company’s net loss increased 16.2% year-over-year to $15.80 million in fiscal 2020. Its net loss in the fiscal first quarter ended March 31, 2021, was $13.50 million, up 513.6% from the prior-year quarter.

Its trailing-12-month EBITDA margin, ROTC, and ROA are negative 10.66%, 11.43%, and 15.27%, respectively.

Risk Factors

DUOL stated in its IPO prospectus that investing in the company’s Class A stock listed on Nasdaq involves a high degree of risk. The highly competitive language industry, with state-ups being launched every day, might disrupt DUOL’s business, given the low switching costs and highly innovative products and services launched  periodically.

Furthermore,  since its inception, the company has incurred operating losses each year and has  yet to generate a profit. Also, its high-risk investments in  product development and innovation might not reap desired returns.

China Ban

The Chinese government’s crackdown on for-profit education companies and building tensions with the United States has resulted in DUOL’s app being delisted from several Chinese app stores. This follows Beijing’s broad mandate requiring ed-tech firms to become non-profit, its bans on foreign curriculums and imported textbooks, and on hiring foreign teachers. Following the release of this news on August 5, shares of DUOL declined 9.1%.

However, it is not clear  whether the app’s removal from stores resulted from the Chinese crackdown. DUOL released a statement saying, “We are working to address the issue and are hopeful that the app will be reinstated in the near term…In the meanwhile, existing users in China can continue to use the app as they always do.”

POWR Ratings Reflect Uncertainty

DUOL has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

DUOL has a C grade for Momentum and Quality. The stock is currently trading below its 50-day moving average of $138.54, which is consistent with the Momentum grade. Furthermore, DUOL’s 72.06% trailing-12-month gross profit margin  is 105.6% higher than the 35.05% industry average. However, the company’s net income margin and ROA are negative, justifying the Quality grade.

Of the 144 stocks in the D-rated Software – Application industry, DUOL is ranked #93.

Beyond what we’ve stated above, we have also rated DUOL for Growth, Sentiment, Stability, and Value. Get all DUOL ratings here.

Click here to view the top-rated stocks in the Software – Application industry.

Bottom Line

DUOL is defined as an “emerging growth company” under the federal securities JOBS Act. It has immense growth potential given the rising popularity of digital learning and ad-tech. However, the DUOL’s negative profitability and increasing losses are a cause for concern. Thus, we think investors should wait until DUOL generates adequate net profits and demonstrates operational efficiency before investing in the stock.

Click here to check out our Software Industry Report for 2021

DUOL shares were trading at $136.35 per share on Friday afternoon, up $2.55 (+1.91%). Year-to-date, DUOL has declined -1.91%, versus a 19.90% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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