Popular language app Duolingo, Inc. (DUOL)’s second-quarter earnings report is on the horizon. In this article, we will evaluate the company’s fundamentals to see if it can deliver strong results in its Q2 earnings.

Renowned for its engaging platform and expansive language offerings, Duolingo has shown robust growth in user engagement and premium subscriptions. In the first quarter alone, DUOL’s daily active users reached 31.4 million, a significant increase from 20.3 million the previous year. Moreover, the number of paid subscribers has jumped 54% year-over-year to 7.4 million (raising the proportion of paying users from 8% to 8.6%).

Continuing its commitment to innovation, the company introduced AI-driven features in March to enrich the learning experience. The premium subscription tier, Duolingo Max, offers users access to powerful AI tools like Roleplay, an AI chatbot for conversational practice, and Explain My Answer, which provides personalized feedback on lesson mistakes.

Moreover, DUOL bolstered its Intelligent Agreement Management (IAM) capabilities by acquiring Lexion, a leading AI-powered agreement management company, in May. This acquisition enhances DUOL’s ability to provide customers with advanced AI-assisted tools, streamlining contract reviews, information retrieval, and process automation.

Street expects DUOL’s revenue for the fiscal second quarter (ended June 2024) to increase 39.6% year-over-year to $177.08 million. Its EPS for the to-be-reported quarter is forecasted to register a robust 299.2% year-over-year growth, settling at $0.32. Moreover, Duolingo has consistently exceeded consensus revenue estimates in all of the trailing four quarters, including the first quarter.

For the first quarter, DUOL’s earnings per share was $0.57, well above the consensus estimate of $0.26, and its revenue was higher than the analysts’ estimates by $1.90 million. With such strong financial performance, expectations are high for another positive earnings outcome in the upcoming report.

Shares of DUOL have gained 12% in the past nine months and 25.3% over the past year to close the last trading session at $187.30. However, the stock has plunged 17.4% year-to-date.

Let’s look at factors that could influence DUOL’s performance in the upcoming months.

Strong Financial Performance

In the first quarter that ended March 31, 2024, DUOL’s net revenues increased 44.8% year-over-year to $167.55 million, with a 53% growth in its subscription revenue of $131.69 million. Its gross profit grew 45.4% from the year-ago value to $122.36 million.

The company’s income from operations amounted to $16.44 million compared to a loss of $8.52 million in the previous year. Its adjusted EBITDA increased by $28.90 million year-over-year to $44.01 million. Moreover, its net income was $26.96 million or $0.57 per share, compared to a net loss of $2.58 million or $0.06 per share in the previous year.

As of March 31, 2024, its cash, cash equivalents, and restricted cash amounted to $832.45 million, reflecting a 29.8% increase from the prior-year period. Also, its free cash flow improved by 176.5% from the prior-year quarter to $79.62 million.

Impressive Historical Growth

Over the past three years, DUOL’s revenue has grown at a CAGR of 45.6%. In addition, the company’s total assets have grown at a CAGR of 82.1% over the same period, and its levered free cash flow has improved at a 79.9% CAGR.

Rosy Annual Forecasts

The consensus revenue estimate for the current year ending December 2024 is $733.54 million, signaling a 38.1% year-over-year increase. Likewise, the company’s EPS is anticipated to witness a robust 380.6% uptick from the previous year, reaching $1.68.

Analysts anticipate a 28.2% increase in revenue for the fiscal year 2025, with projections reaching $696.19 billion. Similarly, EPS for the next year is expected to grow 58.7% from the prior year, settling at $2.67.

Mixed Profitability

DUOL’s trailing-12-month gross profit margin of 73.28% is 99.1% higher than the 36.80% industry average. Likewise, its trailing-12-month net income margin of 7.82% is 59.2% higher than the industry average of 4.91%. In addition, the stock’s 26.33% trailing-12-month levered FCF margin compares to the 5.46% industry average.

However, the stock’s trailing-12-month ROCE and ROTC of 7.15% and 1.10% are 40.3% and 82.5% lower than the respective industry averages of 11.96% and 6.26%. Also, its trailing-12-month EBITDA margin of 3.32% is unfavorably compared to the industry average of 11.26%.

Premium Valuation

In terms of forward non-GAAP P/E, DUOL is trading at 47.68x, 201.9% higher than the industry average of 15.79x. The stock’s forward EV/EBITDA of 41.91x is 320.3% higher than the industry average of 9.97x. Also, its forward EV/Sales of 9.96x compares with the 1.22x industry average.

Furthermore, DUOL’s forward Price/Sales multiple of 11.01 is significantly higher than the industry average of 0.92. The stock’s forward Price/Cash Flow of 37.10x is 276% higher than the industry average of 9.87x.

POWR Ratings Reflect Uncertainty

DUOL’s stance is apparent in its POWR Ratings. The stock has an overall rating of C, which translates to Neutral in our proprietary rating system. The POWR Ratings are calculated by taking into account 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 an A grade in Growth, which is in sync with its solid financial performance in the last reported quarter and impressive historical growth.

On the contrary, the stock has a D for Value, consistent with its higher-than-industry valuation. Also, with a 24-month beta of 1.32, the stock has earned a grade of D for Stability.

DUOL is ranked #76 out of 135 stocks in the Software – Application industry. Click here to access DUOL’s Momentum, Sentiment, and Quality ratings.

Bottom Line

DUOL’s strategic expansion and effective scaling have significantly boosted its revenue and profit margins, driven by a surge in new users converting into paying subscribers. Despite forecasting revenues of $726.5 million to $735.5 million, which only scratches the surface of its potential in a digital language learning market projected to exceed $101.94 billion by 2032, Duolingo stands poised for substantial growth.

Analysts foresee robust triple-digit earnings growth in the upcoming quarterly results and a promising outlook for the year, so Duolingo seems well-positioned to impress investors.

But with DUOL’s elevated valuation, mixed profitability metrics, and heightened volatility, potential investors might consider waiting for a more opportune entry point into this high-profile language app stock.

How Does Duolingo, Inc. (DUOL) Stack Up Against Its Peers?

While DUOL has an overall grade of C, equating to a Neutral rating, you may also check out these A (Strong Buy) rated stocks within the Software – Application industry: Yalla Group Limited (YALA), IBEX Limited (IBEX), and TeamViewer SE (TMVWY). To explore more A and B-rated software application stocks, click here.

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DUOL shares were trading at $177.58 per share on Wednesday afternoon, down $9.72 (-5.19%). Year-to-date, DUOL has declined -21.72%, versus a 18.10% rise in the benchmark S&P 500 index during the same period.

About the Author: Shweta Kumari

Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions. More...

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