Duolingo aims a $3.4 billion valuation in its U.S. IPO

As the Chinese proverb says, “to learn a language is to have one more window from which to look at the world” and that is exactly what Duolingo aims to do; give access to learning new languages universally. The language-learning app will go public on Nasdaq, but how is the IPO going to unfold?

What is Duolingo?

Duolingo Inc. is a mobile language-learning app that offers courses in 40 languages. It was founded by two engineers, Luis von Ahn and Severin Hacker. Its mission is to deliver personalized learning services that resemble the ones a private tutor might offer, but through technology. They aim to make learning fun by developing different ways of picking up new skills, principally through games. Finally, their last mission is to make learning universally accessible. Indeed, studying a new language is expensive and time-consuming. There are 1.8 billion people learning a language around the world and consumer spend on both online and offline language learning represented a $61 billion market in 2019, driving Duolingo’s motivation to unlock the tremendous economic opportunity.

The company's app has more than 500 million downloads and is the top-grossing app in the education category on both Google Play and Apple's App Store. It also has the world’s largest collection of language-learning data which allows them to build unique systems, uncover new insights about the nature of language and learning, in turn, allowing them to apply their findings to the development of the app.

Duolingo also offers English competency tests on behalf of organizations and colleges, in addition to its main language-learning program. The most common application is for university admissions, as many American colleges require potential international students to take an English proficiency exam.

The IPO, why now?

As the pandemic forced people to stay at home, the daily active user count went up significantly in 2020, benefitting Duolingo’s business. Indeed, the company managed to convert part of these new users into paying subscribers. Duolingo shows nice growth numbers but is consistent with bottom-line losses typical to early-stage tech growth stocks. As the company acquired new customers with the pandemic, it can be considered the right time to go public as it allows them to raise capital and thus exploit new opportunities in user growth, etc.

Duolingo announced an initial price range for its upcoming IPO. The unicorn aims to sell 3,700,000 shares in its first public offering at a price of $85 to $95 per share. In total, the company's IPO might see 5,872,029 shares traded, valued at $557,842,755. Duolingo will have 35,892,152 shares outstanding after the IPO, excluding the underwriters' option. Duolingo is worth $3.1 billion to $3.4 billion at the lower and maximum ranges of its basic IPO valuation.

How does Duolingo differentiates from its competitors?

Duolingo’s main competitors are Rosetta Stone and Babbel, two companies that are also in the mobile linguistics business. One way Duolingo’s app differentiate from its opponents is by not charging a subscription fee to its customers, whereas Rosetta and Babbel respectively charge $120 and $85-a-year subscription fee. The language-learning app beats its competitors in terms of active users as it has roughly 28 million while Rosetta has 500,000 subscribers and Babbel around 1 million.

What can potentially explain this disparity is their offer: 37 languages that can be taught in an easy and fun way. Rosetta and Babbel offer 25 and 14 languages to learn, respectively. The following graph shows the number of users per app.

 

Figure of numbers of users Duolingo vs competitors

How does Duolingo make money?

The company operates under a freemium business model meaning its core product can be used free of charge. If customers want to have access to more advanced futures and try an ad-free learning experience, they can, however they must subscribe to the premium version called “Duolingo Plus”. Duolingo makes money via a premium subscription, display ads, as well as its languages proficiency tests.

  • Duolingo Plus: The subscription allows customers to download lessons and access them online, it gives them unlimited hearts and skills tests as well as a progress quiz, costing customers $12.99 per month.

 

  • Advertising: Users that do not have the premium version will see display ads when engaging with the platform and Duolingo gets paid for every display.

 

  • Language proficiency tests: Such tests are used internationally, especially by students who study abroad or seek enrollment in certain universities. Duolingo’s test is proctored (to avoid cheating) by a certified professional, making the test valid. As of May 2021, over 3,000 higher education programs around the world accept Duolingo English Test results as proof of English proficiency for international student admissions. Users pay a one-time fee of $49 to take the Duolingo English Test and if completed with success, they receive a certificate. In 2020, the test was purchased roughly 344,000 times.

Duolingo's financial overview

As covid-19 came around early 2020, companies such as Duolingo saw their revenues increase drastically. Indeed, what better to do when you are at home, and everything is closed than use your phone? That is how Duolingo grew their paying subscribers from 0.9 million in 2019 to 1.6 million in 2020, an 84% growth. As of the first quarter of the first quarter of 2021, it reached 1.8 million. But let’s look at how that translates in terms of revenues: Their revenue was $28.1 million in the three months ended March 31, 2020 and $55.4 million in the three months ended March 31, 2021, representing 97% period-over-period growth. More users and revenues also imply more costs, and those also rose significantly. Sales and marketing costs more than doubled (235%) which can be explained by the company’s will to seize the opportunity to transform those newcomers in long-term users. Finally, the language-learning app still struggles to reach positive returns as in the three months ended March 31, 2020 and 2021, they had net losses of $2.2 million and $13.5 million, respectively. Hereafter, Duolingo’s consolidated statement of operations.

 

Figure of Duolingo’s consolidated statement of operations

 

What unique risks is Duolingo exposed to?

Investing in Duolingo’s Class A (one vote a piece) common stocks involves several risks:

 

  • Usership: What is critical to their business is the size of their user base and their users’ level of engagement. Their financial performance is determined by their ability to add, keep, and engage users and convert them into paying subscribers. If they fail to do so their business may be significantly harmed.

  • Competitive environment: Duolingo evolves in a competitive environment that has not a lot of room to differentiate. Indeed, competitors inspire from each other’s ideas and offers, thus Duolingo risks to lose its clients if they offer is the same as everyone’s.

  • Pandemic recovery: The language-learning app could be threatened by the reopening of schools, people getting back in the offices and life coming back to normal. Is the growth experienced during the pandemic going to last or what is a temporary positive impact?

Conclusion

Duolingo’s prospects seem to be encouraging as their financials statements have shown promising growth. Its leader position in the language-learning industry shows their ability to understand customers’ needs and to transfer their knowledge into their constant evolution. Around 31% of IPOs fall on the first day, making one question whether investors are going to trust the still-rising trajectory of Duolingo’s revenues and user base in the long-term.

The IPO will be one of the first to use Robinhood as an early-stage broker, giving them free publicity, which cannot hurt. However, investors tolerance over negative returns does not last very long, so Duolingo faces a lot of pressure to flip those bottom-line numbers to positive returns as quick as possible. The company has applied for a Nasdaq listing under the “DUOL” ticker symbol, it is expected to go public on July 28th, 2021.

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