Language-learning company Duolingo (DUOL -2.50%) priced its 2021 initial public offering (IPO) at $102 per share. It's tripled in value during the short time since.
Languages have different levels of complexity, but it can take 1,000 to 2,000 hours to learn another language well. Duolingo understands that it's important to keep learners motivated, considering they're starting a long journey. But the company isn't successful simply for recognizing this; it's successful because it's figured out how to actually do it.
Learning a language can be stressful -- one can learn a word, but recalling it at the right time is challenging. Moreover, learning grammar rules that differ from one's first language is an uphill climb. But Duolingo keeps learners on track by including gaming elements in its language learning app. As learners have fun "playing," stress comes down and motivation goes up.
Duolingo also has a system for keeping its users engaged. While it's a little more time-consuming, the company does A/B tests on all of its features. This constant refinement lets it double down on what's working.
The proof is in the pudding. Just look at Duolingo's user trends over the last three years:
| Metric | Q3 2021 | Q3 2024 | Percentage gain |
|---|---|---|---|
| Monthly active users | 41.7 million | 113.1 million | 171% |
| Daily active users | 9.8 million | 37.2 million | 280% |
| Paid subscribers | 2.2 million | 8.6 million | 291% |
Data source: Duolingo's financial filings.
Growth in paid subscribers is particularly important for Duolingo. In the third quarter of 2024, 82% of the company's revenue came from selling subscriptions. Given the incredible growth in this user base, it's not surprising that its revenue has also soared. And since the product is digital, revenue growth has resulted in incredible gains in free cash flow, as the chart below shows:
DUOL Revenue (TTM) data by YCharts.
After three strong years on the stock market, Duolingo is gearing up for 2025. And new artificial-intelligence (AI) tools could make it another good year.
How AI can boost Duolingo's revenue
Duolingo provides paid subscriptions that get rid of ads and unlock other features. But more recently, the company launched a higher subscription tier called Max that's bolstered by some generative AI features.
Ironically, there are some who actually view AI as a threat to education companies generally and language learning specifically. The idea is that rather than going to a business for help, learners can just rely on AI chatbots.
In fairness, the AI space is young, so perhaps this risk simply needs more time to play out. But for now, heading into 2025, AI appears to be a tailwind for Duolingo. Its users can access AI features such as a new video-call feature with its cartoon character Lily, making it feel much more like a real-life conversation. And it seems that users are willing to pay up for things such as this.
Duolingo Max adoption has been good so far. But it's something to watch for 2025 because it's not widely available yet. According to management, only half of its 37 million daily active users had the option as of Q3. As the rollout continues, Max subscriptions could keep rising.
Duolingo's growth rate could consequently be strong again next year. Consider that most of its revenue comes from subscriptions, and that Max is the higher-priced tier. It would take relatively few subscribers here to produce a big boost to the numbers.
Thanks to AI, Duolingo's business could post some big gains in 2025. There are other things to consider in investing, including profit margins and a stock's valuation. But growth is undeniably important. And I would wager that Duolingo will have it next year.
