Equity X-Ray: In-Depth Research #20

Beyond the Green Owl: A deep dive into gamification, AI, and massive user data

Introduction

Duolingo (DUOL) is presently being valued by the market as a very successful gamified language learning app. The market's view of Duolingo is missing critical parts of its evolution from a single-product app into a multi-product education platform, which created a strong competitive moat centered on massive user data and engagement.

Investors obsessed with Duolingo's B2C language business are completely understating the significant long-term opportunity in three new verticals- Math and music and the new, multi-billion-dollar and still-growing corporate e-learning market.

AI is not a problem but rather a strong tailwind that will help Duolingo lower content creation costs and lead to margin expansion. My analysis argues that the market is significantly mispricing the long-term opportunity. Using a robust discounted cash flow model that is predicated on the near certainty of the company's previous execution and stated financial goals, I am issuing a Buy on DUOL with a price target of $520.

Company Background

To appreciate Duolingo's true potential, you must look beyond its gaming-like interface and examine its fundamental strategy. The expressed mission of the company is to develop the best education in the world and to make it universally available. The company accomplishes this through a powerful flywheel based on a freemium model, which included a powerful free version. By offering a robust free version of the app, Duolingo has created one of the most efficient marketing and acquisition engines ever devised, with over 100 million monthly active users, which generates an abundance of data on how people learn.