• Brett Schafer

Deep Dive: Duolingo

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Show Notes

(Ryan) What they do: Mission is to develop the best education in the world and make it universally available. Basically they are a mobile learning platform and right now it’s tailored specifically to learning new languages. Their flagship duolingo app has more than 500 million total downloads and 40 million monthly active users.

You make an account. Say what language you want to learn and then give them your general skill level. Then the user goes through various lessons using verbal and visual tools and can basically progress over time. It helps you set goals, like do 10 minutes of work a day, and will send you push notifications to help you reach those. And it offers over 40 different languages.

They operate a freemium model. So learners that are using duolingo for free receive an ad at the end of each lesson and users who subscribe to Duolingo Plus get it ad free and access to additional features. About 5% of their MAU’s were paid subscribers.

They also offer the Duolingo English Test which is just an assessment of people’s english proficiency. It costs $49 to take and I believe these are done over desktop. The reason they provide this is because a lot of people seek to be highly proficient in english because of the opportunities it can afford (university admissions, work visas, job applications) things like that and the previous proficiency exams are terrible and costly. Have to go in person, which can be tough in developing countries since the testing centers aren’t in every city so you may have to travel, which is even more costly. And Duolingo’s test results are accepted by over 3,000 higher education institutions. 1,500% increase in Duolingo English tests taken this year w/ test centers closed.

They state in their S-1 that they want to become a more diverse learning platform. So going beyond just languages to other subjects like reading, writing, and math.

(Ryan) History: It was founded by Luis Von Ahn and Severin Hacker, who were both engineers prior to starting Duolingo. Luis Von Ahn was a CS professor at Carnegie Mellon and Severin was one of his PhD students and a Macarthur fellow. (The genius grant, where recipients get a $625,000 stipend paid out over 5 years).

Severin grew up in Guatemala and was fortunate enough to receive a good education there. Apparently that’s where the idea was conceived out of. He thought everyone should have access to that. And so together they wanted to build an intelligent learning system.

They founded the company in 2011 where it looks like they had a $3.3M series A round. Since then they’ve raised another $180M in total.

(Brett) Industry/Landscape/Competition:

  1. Digital learning market was $160 billion in 2019, which remember was pre-COVID

  2. Some estimates have it growing at a rapid rate over the next few years with the COVID catalyst, either way large market and growing quickly

  3. With Duolingo’s unique product, they are not only trying to take market share, but build out their own

  4. Within the app-based language market, Duolingo has many small competitors. One that gets good reviews is Babbel. It is 13th on Google Play store vs. #2 for Duolingo in the education category. Cake, Tongo, are other competitors

  5. It also competes with the traditional language learning/certification markets like schools and universities

(Brad) Management and Ownership:

Luis

  1. Luis serves as the CEO and is just 42 years old.

  2. He is a computer science professor at Carnegie Mellon University,and a winner of the MacArthur Genius Grant as well as the Lemelson-MIT Prize for Inventors.

  3. Before founding the company, he led reCAPTCHA — a fraud detection company purchased by Google.

  4. We have just 73 total Glassdoor ratings on Luis’s leadership style but with a 96% approval rating, the data we do have is excellent.

“I plan to dedicate my life to building a future in which, through technology, every person can access the best education.

Severin Hacker

  1. serves as the company’s CTO and is just 36 years old.

  2. Due to the young age, Severin has very limited experience outside of Duolingo (he was 26 at the founding).

  3. The little experience he does have, however, is impressive.

  4. He earned his PhD from Carnegie Mellon (where he was advised by von Ahn)

  5. started his career at Microsoft before developing Duolingo’s programming infrastructure.

Several more higher-ups come from Google

ownership,

  1. Luis and Severin each own 14.6% of the total equity voting power for 29.2% combined.

  2. New View Capital, Union Square Ventures, CapitalG (AKA Google Capital), KPCB Holdings and General Atlantic are the 5 largest institutional holders accounting for 54.8% of the voting power.

  3. Ashton Kutcher and Tim Ferriss are also invested in the company.

(Brett) Valuation:

  1. Ticker will be DUOL.

  2. What are our guesses for what the valuation comes out at?

  3. Believe they are at a $200 mil bookings run rate

(Ryan) Earnings:

  1. $162M in revenue in 2020, up 129% YoY

  2. 72% gross margins, up about 1% from 2019

  3. -$16M in OI

  4. Spending 40% of opex on R&D

  5. Had about $14M in FCF but was spending 10% of revs on SBC

  6. MAU’s 39.9M, up 19% YoY (I imagine less international travel slowed user growth)

  7. Has 1.8M paid subscribers, up 64% YoY

  8. Subs as a % of MAU’s has gone from 3% to 4.5%

  9. Pretty standard earnings for a digital business about to go public

(Brad) Balance sheet and liquidity:

Pre-IPO Duolingo has $117.5 million in cash and equivalents predominantly held in money market funds.

It does have another $18 million in net receivables and the upcoming IPO will certainly bolster the cash position further.

raised $183.3 million in financing since inception but has 0 interest expense meaning there is no current debt on the balance sheet.

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Anecdotal Evidence:

  1. (Ryan) Completed my first lesson this morning. I like the bite-sized approach to learning a new language. Wish I used this before I went to Mexico. Also I watched DuoCon 2020 on YouTube and people had nothing but praise in the comments.

  2. (Brett) Definitely going to try it out. I Am enticed by the product description.

  3. (Brad) Love the product.

Future growth opportunities:

  1. (Ryan) Duolingo ABC. This is their app designed to teach early literacy skills to children ages three to six. This was launched in early 2020 and shares the same tech infrastructure as their flagship app. Makes it easier for them to innovate faster, without having coding redundancies. Logical market to go after. They’re yet to monetize this, but I imagine it’s the kind of thing parents want their kids spending time on and I would think the subscription rate as a % of users would be higher if they implemented the freemium model.

  2. (Brett) People moving more with remote work, rise of Airbnb, stuff like that. The more people move around the world the more people want to learn more languages.

  3. (Brad) International expansion is in the very early innings and very strong. Asian MAUs + 130% year over year. International value prop is even stronger with over half of its MAUs learning English with another language so this dominates with global expansion. This is extremely untapped and where the company can provide the most value today.

Highlights and lowlights:

  1. (Ryan) Highlights: I think the app is effective. I like the way the courses are taught. And I could see how this would work really well for younger kids. And could maybe even be used as a supplement to the classroom. Lowlights: I’m not sure Duolingo plus is that compelling of an offering yet, and I don’t necessarily like just the ad-supported side. Obviously they can improve that and it looks like they are.

  2. (Brett) Highlights: Almost endless runway for growth if they execute, founder-led, all stakeholders win if Duolingo succeeds, and good unit economics. Lowlights: tail risk from Google Translate, spending growth on S&M, one-time COVID boost, and conversion to paid subscribers seems weak. I am unsure they can develop a moat in this industry, but am not sure they won’t (like with a commodity company)

  3. (Brad) The study they did on efficacy was eye-opening It’s also rapidly shifting users from monthly to annual subscriptions which 4Xes renewal & 2Xes LTV (15% fee after first year vs. 30%).

Bull Case:

  1. (Ryan) They can really win the bite-sized learning market and branch into other areas. An all in one educational app or family of apps is what they’re going after, and pending a fair multiple, if they achieve that would result in good returns.

  2. (Brett) With no market cap this is tougher to identify. But In order to get to $1 billion in annual bookings the key driver will be growth in paying subscribers, very simple. If I was invested in this company I would be looking for management to talk about how they can continue to increase free-to-paid conversions.

  3. (Brad) Subscriber conversion continues and this company can successfully morph from language learning to online education with successful introduction of Mathematics and Language arts. Also international expansion continues to work.

Bear Case:

  1. (Ryan) Bear case is that this gets priced like successful expansion into new markets is a guarantee. Because that will probably be a bit tougher. Risk of trendiness. Could it be kind of a fad?

  2. (Brett) # of paying subs hits a ceiling. Google Translate brings in tail risk with a product that renders 2nd-language learning unnecessary (Duolingo could come up with this but it would be harder for them).

(Brad) This is just a language learning app, rather than online education.

Our Sunday Deep Dives are sponsored by Potential Multibaggers. Looking for stocks that have the potential to go up 10x over 10 years? Check-out Potential Multibaggers on Seeking Alpha or on Twitter @FromValue

Disclosure: The authors and podcast guests are not financial advisors. Brett Schafer and Ryan Henderson are portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this podcast.

#DUOL #Duolingo

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