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Duolingo, Inc.

DUOL

Wall street consensus:

### Consensus View on Duolingo Inc. (DUOL) Q4'23 Earnings and 2024 Outlook

#### Overall Performance Assessment
The consensus derived from the available research presents Duolingo Inc. as a company exhibiting robust operating momentum as it exits Q4'23 and steps into 2024. There's a clear recognition of the company's impressive ~50% year-over-year increase in bookings, largely attributable to the strength of its product offerings, marketing strategies, and specific initiatives like family plans and New Year promotions. However, a note of caution is sounded regarding the slight pressure observed in revenue and gross margins, primarily within the advertising division, hinting at challenges in revenue diversification. Despite these concerns, Duolingo's strong focus on enhancing its product experience and content, particularly within its English language offerings, positions it well for sustained long-term growth. This balanced view acknowledges the company's potential for further expansion while highlighting the critical areas needing attention to maintain its trajectory.

#### Synthesized Insights from Key Topics

1. **Operating Momentum:** There’s a unified view on Duolingo's strong year-end performance, underpinned by a significant increase in bookings. This success is attributed to effective product and marketing strategies, showcasing the company's capacity for driving long-term growth through operational excellence.

2. **Revenue and Gross Margin Pressure:** The reports converge on the recognition of existing pressures on revenue and gross margins, chiefly from the advertising business. This aspect underscores the importance of strategic adjustments and diversification in mitigating these pressures and stabilizing growth.

3. **Operational Focus for 2024:** Looking ahead, Duolingo's commitment to investing in product experience and content improvement is widely acknowledged. This strategic focus is seen as a pivotal factor in enhancing the company's market positioning and user engagement, particularly in the competitive English language learning segment.

#### Collective Future Investment Considerations

1. **User Engagement and Growth:** A paramount consideration for investors is Duolingo's capacity to sustain or amplify user growth and engagement. The guidance on a 35%+ incremental margin for 2024 offers a promising outlook, yet demands ongoing observation of engagement metrics.

2. **Advertising Business Performance:** Given its critical influence on the company's financial health, the performance and strategic management of the advertising segment require vigilant monitoring.

3. **Product and Content Diversification:** Duolingo's endeavors to diversify its product line and enhance content quality, especially for its core English language classes, present both significant growth opportunities and potential challenges. The effectiveness of these efforts will play a crucial role in the company's future trajectory.

4. **Market and Valuation Risks:** The broader market risks and Duolingo’s high growth-adjusted valuation signal the need for careful consideration of the company's risk/reward profile, especially in light of the competitive landscape and market expectations.

In conclusion, while Duolingo Inc. demonstrates promising operational momentum and strategic focus that positions it well for future growth, investors are advised to closely monitor key metrics related to user engagement, advertising performance, and product diversification efforts. Additionally, careful consideration of the broader market and valuation risks is essential for assessing the company's longer-term investment potential.

Ticker:

​Recent Conference Call

### Summary of Duolingo, Inc. (NasdaqGS:DUOL) FQ3 2023 Earnings Call

#### Insightful Quote by the CFO:
Matthew Skaruppa highlighted the substantial year-over-year growth, expressing confidence in their ongoing strategies: "Our continued strength in user and subscriber growth drove bookings and revenue growth of 49% and 43% year-over-year, respectively. This quarter's performance, along with improvements in our bottom line, enables us to raise our full-year outlook confidently."

#### Key Quarterly Business Trends:
1. **User Growth and Engagement**: Duolingo reported a significant increase in Daily Active Users (DAUs) and Monthly Active Users (MAUs), showing robust engagement across its platform. This trend ties back to the effectiveness of their experimental marketing strategies and product enhancements, including the successful integration of the Barbie campaign and Duocon.

2. **Diversification of Learning Subjects**: The introduction of new learning subjects, namely math and music, within Duolingo's flagship app indicates a strategic move towards providing a multi-subject learning platform. This development seeks to leverage Duolingo’s proven gamification model to scale new subjects rapidly.

3. **Financial Performance and Guidance**: With an uplift in bookings and revenue growth and a substantial improvement in adjusted EBITDA margin, Duolingo's financial health appears strong. The CFO's comments on raising the full-year outlook for bookings growth and adjusted EBITDA margin reflect confidence in the company’s revenue strategies and operational efficiency.

#### Analysts’ Questions and Management Answers:
1. **User Growth Sustainability (Ralph Edward Schackart, William Blair & Company)**: Inquired about the drivers behind consistent outperformance. Luis Alfonso von Ahn attributed growth largely to product improvements, marketing strategies, and unexpected endorsements like the Barbie movie, emphasizing the difficulty in predicting such events.

2. **ARPU Improvement (Mark Mahaney, Evercore ISI)**: Raised concerns about the future trend in Average Revenue Per User (ARPU). CFO Matthew Skaruppa expected ARPU trends to improve, owing partly to lapsing previous pricing adjustments and ongoing pricing experiments.

3. **Expansion into New Learning Areas (Alexander James Sklar, Raymond James & Associates)**: Questioned Duolingo's strategic plan for adopting new subjects into their app. Luis highlighted the integration of math and music as a deliberate move to diversify learning content, enhancing user engagement and platform commitment.

#### Outlook or Guidance:
Duolingo has raised its full-year guidance for 2023, reflecting a more optimistic outlook based on their performance in FQ3 2023. Bookings are expected to grow by 40% year-over-year, with marked improvements in revenue and adjusted EBITDA margin. The readiness to adjust the product offering (e.g., introducing math and music) and continued emphasis on marketing innovations support the anticipation of sustained growth and operational efficiencies, aligning with the strong financial performance in the

Key Questions to follow

Given the context of Duolingo Inc. (DUOL) and the thematic investment tag focusing on E-commerce and Direct-to-Consumer strategies, analyzing the provided document reveals several areas of interest concerning Duolingo's future growth prospects. The insights from the Goldman Sachs research report as summarized provide a base for generating thoughtful questions. Here are three insightful questions that focus on the company's potential for future growth within this thematic investment context:

1. **Engagement and Diversification Strategies**: Considering Duolingo's notable ~50% year-over-year increase in bookings, largely driven by product and marketing strategies such as family plans and New Year promotions, what specific engagement and diversification strategies could Duolingo deploy to further capitalize on its Direct-to-Consumer model? Are there untapped areas within the e-commerce sector that Duolingo can leverage to enhance its offerings, such as personalized learning experiences or subscription-based premium content, to not only maintain but also accelerate this impressive growth trajectory?

2. **Mitigating Risks in the Advertising Business**: With the acknowledgment of slight pressure on revenue and gross margins from the advertising division, what innovative approaches could Duolingo explore to mitigate these challenges and potentially transform its advertising business into a more significant growth driver? Could Duolingo consider adopting emerging digital marketing trends, such as AI-driven personalized advertisements or new formats of interactive ads, to improve user engagement and advertising effectiveness? How can these strategies align with Duolingo's E-commerce and Direct-to-Consumer focus to create a more synergized growth approach?

3. **Evaluating the Competitive Landscape within E-commerce and Direct-to-Consumer Trends**: Given the high growth-adjusted valuation concerns and the competitive landscape within the e-commerce and Direct-to-Consumer space, how does Duolingo plan to sustain its competitive advantage and differentiate its offerings? Are there specific innovations or strategic partnerships Duolingo is considering to enhance its product experience and content diversification in a way that addresses the evolving needs of online learners and positions Duolingo uniquely in the market? Additionally, how does Duolingo intend to navigate and manage the broader market risks, especially those concerning investor perceptions and market expectations related to its sector?

These questions delve into Duolingo's future growth strategies within the thematic investment focus, addressing areas of user engagement, advertising business optimization, and competitive positioning while taking into account the operational challenges and opportunities highlighted in the Goldman Sachs research report summary.

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