Diverse Courses And AI Will Drive Global Engagement

Key Takeaways

• Diversification through new subjects and global expansion into underserved markets aims to boost user engagement and monetization opportunities.
  
• Implementation of generative AI and immersive features enhances operational efficiency and user experience, driving subscription growth and profitability.
  
• Expansion into new courses may boost engagement but not revenue, while reliance on international markets could lead to earnings volatility amid economic shifts.

Catalysts

Operates as a mobile learning platform in the United States, the United Kingdom, and internationally.

• The addition of new subjects such as chess, music, and math, alongside traditional language courses, is a key strategy to increase user engagement and attract more users globally. This diversification is expected to broaden the user base and, in turn, increase revenue through greater monetization opportunities as these subjects grow.
  
• The implementation of generative AI is reducing content production costs and accelerating the delivery of new features, such as personalized conversation practice tools. This can improve operational efficiencies, potentially widen net margins over time, and enhance the overall user experience, driving higher subscription adoption.
  
• The development of 3D features for tools like Video Call with Lily is designed to increase user engagement and subscription conversions. By making the product more immersive and engaging, Duolingo expects to drive higher user retention and growth in premium subscriptions, positively impacting earnings.
  
• Global expansion and deeper language course offerings are intended to capture underserved markets, particularly in English learning for non-native speakers. By filling language gaps and offering advanced content, Duolingo aims to boost its reach and revenue, as the strategy targets markets with significant demand for English education.
  
• Ongoing pricing optimizations and potential tier restructuring, such as offering AI features in lower-tier subscriptions as costs decrease, could drive higher subscriber conversion rates. This, coupled with efficient marketing strategies that emphasize viral growth, could meaningfully enhance Duolingo's revenue and profitability metrics.

Duolingo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Duolingo's revenue will grow by 26.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.9% today to 20.8% in 3 years time.
• Analysts expect earnings to reach $343.2 million (and earnings per share of $5.84) by about May 2028, up from $96.8 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $244 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 83.4x on those 2028 earnings, down from 230.5x today. This future PE is greater than the current PE for the US Consumer Services industry at 19.0x.
• Analysts expect the number of shares outstanding to grow by 5.41% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.42%, as per the Simply Wall St company report.

Duolingo Future Earnings Per Share Growth

Risks

• The anticipated 150 basis point decline in gross margin year-over-year, coupled with a 50 basis point decline expected in the second quarter, suggests potential challenges in maintaining profitability, which could impact net margins.
  
• Expansion into new courses and subjects like chess and music, while potentially increasing user engagement, may not generate significant revenue immediately, impacting overall earnings growth.
  
• Despite growth in daily active users, a substantial portion of Duolingo's user base is in countries with low GDP per capita, which can lead to lower subscription conversion rates and impact revenue generation.
  
• Dependence on macroeconomic factors and global markets for revenue, as a significant portion of bookings are international, could lead to revenue volatility if economic conditions worsen.
  
• Potential cost optimization from AI is being reinvested rather than contributing to profitability improvements, which may delay improvements in net earnings and margins.

Valuation

• The analysts have a consensus price target of $447.865 for Duolingo based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $515.0, and the most bearish reporting a price target of just $315.12.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.7 billion, earnings will come to $343.2 million, and it would be trading on a PE ratio of 83.4x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of $490.55, the analyst price target of $447.86 is 9.5% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.