Under the Spotlight: Duolingo (DUOL)
With over 500 million downloads worldwide and 40 million monthly users, Duolingo is the most popular language-learning app on the planet. The secret of its success? Gamification, a freemium business model and a friendly green owl named Duo who gets really disappointed when you miss your lessons. Read on for more on this freshly listed company.
“Duo is sad! You haven’t practiced Spanish in 5 days.”
If you’ve tried to learn a language in the last ten years, you’ve probably been hit with this notification. With over 500 million downloads worldwide and 40 million monthly users, Duolingo is the most popular language-learning app on the planet. The secret of its success? Gamification, a freemium business model and a friendly green owl named Duo who gets really disappointed when you miss your lessons.
Founded in 2009 by computer scientists Severin Hacker and Luis von Ahn (also the founder of reCAPTCHA), Duolingo was born with a mission to democratise language learning. With Guatemalan origins, von Ahn saw how the high cost of language schools in his country made it difficult for millions of people to learn a second language and, as a result, improve their economic and social standing.
Already successful with the sale of reCAPTCHA to Google, Von Ahn then considered creating a non-profit app that would facilitate language learning but feared the business model wouldn’t be able to sustain itself. The way he would fund his app would be a freemium model, where users can take the app’s language courses for free by occasionally dealing with ad interruptions, or pay US$6.99 as a monthly subscription.
This was only part of the equation. The product itself had to appeal to users and invoke continued use. Learning a language takes commitment to usually mundane tasks. It’s not easy. Knowing this, Duolingo gamified their product. Fun characters, experience points and rewards for daily streaks, make learning feel much more like a video game than repeating grammar rules and studying verb conjugations.
Duolingo is now the top-grossing education app on both the Apple App Store and Google’s Play Store. In fact, the term “Duolingo” is nine times more popular on Google than the expression “learn Spanish”. With that popularity, the DUOL share price saw it’s all time high of US$202.69 in September 2021.
Despite being Duolingo’s flagship product, the learning app is not the company’s only revenue stream. The English certification offered by the company is an increasingly requested product, with more than 334,000 sales in 2020. Created to compete with more expensive certifications such as TOEFL, IELTS and CAE, which can cost hundreds of dollars, the Duolingo certification is a more affordable option, costing just $49 and is recognized by more than 3,000 universities around the world, including prestigious centres such as Yale, Stanford, MIT and Columbia.
In addition to the English language certification and language courses, Duolingo intends to expand into other areas of education, consolidating its position in the EdTech sector. One of the company’s initiatives already underway is Duolingo ABC, an application aimed at teaching children between the ages of three and six how to read and write. The company also hopes to offer products aimed at teaching mathematics and other areas of knowledge, at different levels to meet the most diverse audiences.
The Language of Money
Even with only about 5% of monthly active users having paid subscriptions, the company’s gross revenue has been growing consistently, at an average rate of 129% per year. In 2020, the company’s revenue was US$161 million and the estimate for the second quarter of 2021 is that the number is in the region of US$57 million. Of this revenue, only 17% comes from in-app ads, although this segment has gained importance for the company, rising 39% in the first quarter of this year, totalling US$4.3 million.
Duolingo Plus subscriptions are therefore fundamental for the company and are fortunately growing: in 2020 the number of subscribers rose 84%, totaling 1.6 million. In the first quarter of 2021, the increase was 12.5%, totaling 1.8 million subscribers. However, it is not enough just to analyze the total number of payers for the app: it is important that paying users stay longer on the platform.
According to Duolingo, App Store and Play Store retain 30% of the revenue in the first year of subscription, dropping to 15% after the first 12 months. That is why it is so essential for the company to be able to extend the period of permanence of its users, which it has successfully achieved. In 2020, 71% of its subscribers had annual plans and, of these, 40% renew their subscriptions for longer periods.
A Tongue Twister Challenge
If Duolingo has been able to achieve its goals, that does not mean that there are no challenges on the way. While the company’s revenue has been growing, so have its operating costs, mainly in R&D, which totaled US$53.7 million in the first quarter of 2021, against US$22.3 million in the same period last year.
The language learning market is booming, with the company estimating that around 1.8 billion people are studying a foreign language right now, a market that can move more than $61 billion annually. Duolingo was certainly one of the biggest winners in this market during the Covid-19 pandemic, which not only caused students to drop out of face-to-face language schools but also offered more free time for home office workers, who were able to take the opportunity to learn a new language through their smartphones.
However, it is unclear whether Duolingo will be able to progress at the same pace of growth as in 2020 in a post-pandemic scenario, where the company will have to face not only competitors in the online educational market, but also offline. In addition, if issuers of certifications such as TOEFL and IELTS feel pressured by Duolingo’s English certification, which grows exponentially and now accounts for 11% of the company’s revenues, it is possible that they will reduce their prices and use the greatest prestige that have to capture Duolingo customers.
This does not constitute financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.
Stella is a markets analyst and writer with almost a decade of investing experience. With a Masters in Accounting from the University of Sydney, she specialises in financial statement analysis and financial modelling. Previously, she worked as an equity analyst at Australian finance start-up, Simply Wall St, where she took charge of the market insights newsletter sent out to over a million subscribers. At Stake, Stella has been key to producing the weekly Wrap articles and social media content.