Their gamification features and personalized learning experiences help users speak. Additionally, Duolingo offers the Duolingo English Test, an online and affordable assessment of English proficiency (officially accepted by over 4500 universities and institutions worldwide; including top schools such as Yale, Stanford, MIT, Duke and Columbia). The test has been taken in more than +12,000 cities worldwide. The Duolingo English proficiency test, launched in 2017, serves as a cost-effective alternative to traditional tests, reaching $32.7 million in sales in 2022 and contributing 8.85% to total revenues.

Snapshot: Number of Duolingo English Test taker cities in a range of countries and regions

Moving on, Duolingo continues to focus on enhancing its language learning platform with AI-driven features like Duolingo Max to improve content, which is expected to retain its growing user base.

Duolingo Max powered by Chat GPT-4

Access to quality education is a critical factor in determining a person's success. According to the Economic Policy Institute, there is substantial differences in proficiency scores, with North America and Western Europe boasting 97% and 100% proficiency in math and reading, while Southern and Western Asia lag significantly behind. Duolingo, with its innovative approach to language learning, offers a potential solution to bridge this educational gap and empower individuals globally.

Duolingo addresses education challenges through three key strategies. Firstly, it prioritizes affordability, offering free access supported by ad sales (12% of 2022 revenues). The Duolingo Plus subscription, priced at $6.99/month (8% of Paid Subscriber Penetration).

The company posted impressive results in the latest quarter, with revenues surging 43% YoY to $137.6 million and total bookings reaching $153.6 million, a growth of 49%. Monthly Active Users (MAUs) increased by 47% YoY to 83.1 million, and subscriptions showed robust growth, rising 60% YoY to 5.8 million.

The business stands out by incorporating gamification elements for an engaging learning experience. In addition,  consumer response is evident in its status as the top-grossing education app, with 800 million downloads. This success is also due by the Duolingo's AI applications, like "BirdBrain" and "Smart Tips," that tailor course difficulty and address common errors during lessons.

Globally, 1.8 billion people are actively engaged in language learning, contributing to a $61 billion total addressable market (TAM). The language learning market is expected to grow at an 11% compounded annual growth rate (CAGR) until 2025, reaching $115 billion. Duolingo's online niche is set to outpace this, with a 26% CAGR during the same period, leading to a significant increase in online language learning penetration from 19.6% to 40.8% by 2025, equating to a $47 billion market size. Approximately 80% of Duolingo's users are new to language learning, highlighting the app's inclusivity. The company's expansion into new subjects positions it to tap into the $6 trillion annual global education spend.

The company invests heavily in R&D to drive user engagement and customer satisfaction on their platform, which they believe helps to drive organic growth of new users. They spent over $150M in 2022 while Sales and Marketing spending cost was around $67M.

Duolingo faces competition from educational alternatives like Babbel, Tandem, or Kahoot as well as indirect threats from online tutors and traditional services. Video games, streaming, and social media are substitutes but the pandemic had a positive impact for the company who was a boost in its English test as testing center were closing and remote leaning gained importance.

After its IPO, it initially faced a challenging period, losing approximately 50% of its market cap in the following 8 months. However, the stock made a remarkable recovery and has emerged as one of the top performers in 2023, experiencing a significant uptick of 200%.

From 2021 to 2022, net sales surged from $251 million to $369 million and are projected to reach $528 million in 2023. Similarly, EBITA is anticipated to follow this upward trajectory, climbing from $15.5 million in 2022 to an expected $89 million in 2023. Duolingo's recent quarter announcement revealed a noteworthy 43% YoY increase in revenue between Q3 2022 and Q3 2023, with Adjusted EBITDA reaching $22.5 million, compared to $2.1 million the previous year.

Analysts foresee a net income of $72.9 million for 2025, boasting an 8.4% net margin and a 5.5% operating margin. This positive trajectory extends to the EPS, forecasted to rise from $-1.51 in 2022 to $1.47 in 2025, accompanied by a robust ROE of 18.4%. Despite initial challenges, Duolingo's financial outlook appears promising, with a notable recovery and strong growth prospects.

However, the recent surge in the stock price has significantly impacted its valuation, with the current P/E ratio standing at 1021x for 2023, 310x for 2024, and 145x for 2025. These ratios indicate an exceptionally high valuation, signaling that the stock is currently trading at premium levels.

Duolingo demonstrates strong revenue growth, a steady rise in paid subscribers, and strategic initiatives like Duolingo Max, positioning the company for ongoing success. It's crucial, however, to be mindful of the current premium at which the company's stock is trading.