00:00 I think it's worth taking a look at Duolingo because it's one of the best performing stocks
00:04 this year gaining over 90%. The company helps people learn languages through its app and it's
00:10 got a successful marketing strategy via social media channels like Instagram and TikTok where
00:15 it has over 6 million followers. Based on the current share price, the company has a market
00:20 cap of $5.6 billion. With $600 million of cash and no debts, the enterprise value is roughly $5
00:26 billion. Revenue sits at $370 million over the last 12 months but the company is not yet profitable,
00:32 reporting minus $60 million in net income. Free cash flow is positive at $48 million and
00:38 stock-based compensation is also significant at 20% of sales. However, the story with Duolingo
00:45 is rapid revenue growth. Revenues have grown from just $71 million in 2019 to $370 million today,
00:53 that's an increase of 5x. Gross margins are good too, increasing from 71% in 2019 to 73% today.
01:02 Duolingo can also be proud of the positive impact it's having. The app has over 500 million users,
01:08 37 million of which pay to improve their language skills. Compare that to Pinterest which has a
01:14 similar audience and is valued at $18 billion. Key to the success of Duolingo is its gamified
01:20 approach to learning and there's no doubt the company can expand its offering to incorporate
01:25 more subjects such as mathematics, physics and more. Currently, Duolingo has four different
01:30 revenue sources. Subscriptions, which make up 74% of total revenue. In-app advertising makes up 12%,
01:37 the English test makes up 9% and in-app purchases make up 5%. Duolingo is unlike many companies at
01:45 the moment in that it's got no plans to rein in costs. It's successful marketing approach and
01:51 rapid growth means it's able to keep investing its profits. Although the company reports negative net
01:57 income, the structure of Duolingo's costs reveal how good the brand actually is. The company spends
02:03 only 18% on sales and marketing while it's growing revenue at 50% per year and 40% is being directed
02:10 to research and development indicating plans for new products. So the real problem here is the
02:16 valuation. At $5 billion, the company is quite expensive at 13 times revenue. Let's assume a
02:22 scenario where revenue grows 25% per year for the next 5 years and the business manages to get to
02:29 30% EBITDA margins. Under that scenario, EBITDA would be $340 million in 5 years time. A 30 times
02:37 multiple to that figure gets us to an enterprise value of roughly $10 billion and that works out
02:42 to an investment return of 15.3% per year under that scenario. That seems a little steep and if
02:49 TikTok gets banned that would probably hurt Duolingo's reach as well. But all that said,
02:54 this is still a young company and it's not facing a great deal of competition.
02:58 If it can surpass expectations then it could build a much larger empire. That's why I'm giving the
03:04 stock a bullish rating today but these are my personal opinions, not financial advice and I've
03:10 got no position in the stock at this time. For more detailed investing ideas visit our website
03:15 overlookedalpha.com
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