Duolingo plans to go public at a valuation of around $3.3 billion. Duolingo is an edtech company and can be compared to public edtech peers like Coursera and Chegg. While neither of these companies directly compete with Duolingo, how they are valued and evaluated can give some insight into whether Duolingo is pricing itself fairly for the public markets. 

All values are from most recent fiscal year based on this report’s original authorship.

Duolingo’s initial public offering (IPO) valuation is slightly overpriced compared to its peers in the edtech industry. While you could potentially justify the company’s price because of its strong financial growth, user traction, and market potential, a 21x revenue-to-valuation multiple is uncharacteristically high for an edtech company. 

When considering how Duolingo’s shares might perform after its IPO, its edtech peers may again offer touchstones. Chegg has been public for nearly a decade, while Coursera and PowerSchool went public in 2021. 

• Chegg filed to go public in November 2013 at $12.50 a share. It opened 12% lower — at around $11 a share — before ending the day at $9 a share. Since then, Chegg stock has soared to $70, up more than 668% since going public.
• Coursera opened at $39 a share at the end of March 2021, 18% above its initial pricing of $33 a share. Coursera reached a high of close to $56 before ending its opening day at $46 a share. Since going public, Coursera shares have settled at around $31 a share, down 32% year-to-date for 2021.
• PowerSchool priced its shares between $18 and $20. At opening in July 2021, PowerSchool’s shares were priced at $18.50 before reaching an intraday high of $18.90. It eventually closed at $18.45. PowerSchool stock has since risen in price to $23.70, up 28.4% year-to-date for 2021.

Overall, edtech IPOs have been slightly overpriced when going public. While Duolingo’s stock could see a noticeable pop in its first day of trading, it’s possible that the price will decrease over time. 

Duolingo is the de facto platform for casual language learners to learn a new language. Duolingo offers courses in 40 languages and has approximately 40 million monthly active users. For context, there are more people in the United States learning languages on Duolingo than there are foreign language learners in all U.S. high schools combined. Additionally, Duolingo’s millions of users complete more than 500 million exercises every day according to the company’s prospectus. 

More than 3000 higher education programs accept Duolingo’s English Test (DET) results as proof of English proficiency for international student admissions. In 2020 alone, about 344,000 individual Duolingo English Tests were purchased, primarily by prospective international students. The company and its products have a major influence on the language learning market. 

Global language learning is also a massive market opportunity. HolonIQ estimates there are 1.8 billion people across the world learning a new language. The global edtech market itself is estimated to be worth $63 billion and is growing at a blistering 16.3% yearly. Much of the demand for language learning comes from people seeking to learn English, and Duolingo saw a 2,000% increase in its English test-taking volume from 2019 to 2020. Higher education and foreign immigrant workforces will provide key opportunities for Duolingo to continue expanding its revenue streams.

The genesis of Duolingo started in 2009 when Duolingo co-founders Luis von Ahn and Severin Hacker met at Carnegie Mellon University. Von Ahn grew up in Guatemala City where he saw how expensive it was for people in his community to learn English. He had the privilege of attending a “fancy private school” where he was able to learn English, which magnified his perspective on learning. While a PhD student at Carnegie Mellon, Luis von Ahn helped invent CAPTCHA to help distinguish bots from humans. Von Ahn gave CAPTCHA to Yahoo for free, which set the stage for von Ahn to create reCAPTCHA. reCAPTCHA was very similar to CAPTCHA except that the prompts presented were scans of books. reCAPTCHA crowdsourced the digitization of books for the Internet Archive through millions of users completing security tests. reCAPTCHA was eventually sold to Google. Von Ahn then became a professor at Carnegie Mellon where he met Duolingo’s current CTO and co-founder Severin Hacker. Hacker’s professional experience pre-Duolingo is limited to two brief internships. 

Duolingo’s board of directors contains a diverse group of independent advisors as well as previous investors. Duolingo currently has eight board members including Luis von Ahn and Severin Hacker who serve as board chairman and board director, respectively. Other board members include Amy Bohutinsky, Sara Clemens, Bing Gordon, Gillian Munson, Jim Shelton, and Laela Sturdy.

Lastly, the Duolingo team will continue expanding its domestic and international footprint. Duolingo’s “Careers” page and its prospectus indicate that China is an important part of its international strategy. As such, the company has a Beijing-based office and is continually hiring more China-based team members. Overall, Duolingo’s founding team of von Ahn and Hacker are well-seasoned founders who have been able to guide Duolingo to an IPO. The duo have assembled a world-class team of engineers, linguists, investors, and more, and the two can be relied on to continue to guide Duolingo to future success.

Duolingo has built an incredibly successful language learning platform. What started as a web-based, crowdsourced translation service has evolved into a free, gamified, primarily mobile, language learning platform. Duolingo currently offers two main products: its learning content/product (which is entirely free) and its Duolingo English Test. 

The online learning content is Duolingo’s main product. This content can be accessed via the web or through its extremely popular mobile app. Users of Duolingo learn a language via courses that contain various “units” that teach a variety of language skills. Within this inherently solitary learning experience, Duolingo has woven in several gamification features and monetization strategies. Gamified features like “leveling up,” “leaderboards,” and more create an engaging — albeit questionable — learning experience for Duolingo users. 

In 2016, Duolingo launched its Duolingo English Test (DET) product which is used as a Test Center certification. The DET is a score used primarily by education institutions to help with college admissions. These tests have normally been monopolized by in-person tests like the standardized Test of English as a Foreign Language (TOEFL). Unlike the TOEFL, the DET is a $49, one-hour test that can be done anywhere on a desktop with results in two days. The DET didn’t catch fire until 2020 when a major need for online tests arose. Accordingly, more than 2000 schools began accepting the DET, and there was also a 2,000% increase in test-taker volume from 2019 to 2020.

At launch, Duolingo said it would never use advertisements, subscriptions, or in-app purchases, but the company has now incorporated all three approaches as part of its monetization strategy. In 2020, 73% of Duolingo’s revenue came from “Duolingo Plus,” 17% from advertisements, and approximately 10% via the DET. 

Going back to its language courses, much of the criticism aimed at Duolingo is its inability to effectively teach students how to fully learn a language. Competitors Babbel and Busuu say the solitary learning and gamification features of Duolingo are contradictory with high-quality language learning. The two competitors use social-based learning in which users talk in real-time with native speakers. Regardless of the criticism levied at Duolingo, the company plans to develop additional tools and products that will help its users more effectively learn languages. To that end, Duolingo’s initial public offering (IPO) will help raise the additional capital needed to rewrite courses and create more tools like Birdbrain to help users learn more effectively. Birdbrain is Duolingo’s machine learning model that acts like a personalized recommendation system by learning what users know and don’t know.

They say luck is when preparation meets opportunity, and the continued shift towards digitalization helped Duolingo capitalize on an immediate need for digital tests. Duolingo will likely continue to shape how language is learned as it continues to build more products and features into its language-learning platform. 

Duolingo has amassed more than 500 million registered users. While each user is more than likely not unique, those 500 million registered users equate to more than 6.4% of the world’s population. When examining the company’s performance, it’s useful to specifically focus on monthly active users (MAUs), paying users, and how MAUs relate to revenue.

All values in millions.

Duolingo’s MAUs grew 34% from 2019 to 2020. That growth has continued into 2021, with 39.9 million MAUs in the first quarter 2021. Much of Duolingo’s recent growth can possibly be attributed to the pandemic as the company had 27.3 million MAUs at the end of 2019 and 33.5 million MAUs by the end of March 2020. 

Duolingo has also seen moderate success in converting its free users to paying users. Paying users grew 84% from 2019 to 2020. From Q1 2020 to Q1 2021, paying users grew around 64%. While the company has been able to convert more free users to paying users, both numbers are still lower than the 128% growth the company generated from 2019 to 2020. Growth may have slowed in the first quarter of 2021 because of optimism around COVID-19 vaccines and the hope that in-person activities would resume. 

Next, let’s compare the percentage of paid users to total MAUs. Just over 3% of Duolingo’s users were paying users in 2019 (900,000 paying users / 27.3 million MAUs). That number grew to 4.4% in 2020. By the first quarter of 2021, it reached 4.5%. The numbers here paint a similar story to the ones above. While the company has converted more of its free users to paying users, Duolingo is facing a slowed conversion rate. The company only converted an additional 0.1% of free users to paying users in the beginning of 2021. At that same rate, Duolingo will only have 4.8% of its users providing payments, which is a significant slowdown in conversion rate. 

While paying user growth has slowed, growth is growth, and it should be seen as a good sign for Duolingo. While a gain of $0.07 in revenue per MAU for a quarter may not seem like much, it’s substantial when you have 40 million total users. Duolingo’s overall growth story is a mixed bag as most numbers on the surface paint a rosy picture, but there does seem to be a material slowdown in the company’s growth. The results for 2021 will be equally interesting when released because of the ongoing pandemic.

A public investment in Duolingo has some unique risks attached to it. While the company has many of the classic risks associated with it (attracting and retaining free and paid users, intense competition, etc…), Duolingo’s “Risk Factors” section includes some interesting risks. For starters, the company mentions “users feel that their experience is diminished as a result of the decisions we make with respect to the frequency, prominence, format, size and quality of ads that we display.” As this post indicates, many Duolingo users feel the company is a bit too aggressive in marketing its premium plan. 

While potentially minor, COVID-19’s impact on global economies may actually lessen the need to know additional languages and for Duolingo’s product. International supply chain issues resulted in people looking for alternative suppliers, primarily domestic suppliers. In-house supply chains that don’t suffer from foreign logistic issues could lessen the need for learning additional languages. 

Lastly, Duolingo notes that educational institution adoption will be part of Duolingo’s success moving forward. If schools and other educational institutions do not recognize technology-based assessments like the Duolingo English Test (DET) or choose to use virtual tests less, then the success of the DET and perhaps future products could be limited. Since the world has shifted increasingly towards digitalization, this risk seems unlikely, but it should be noted.

In a bearish scenario, one should be worried by Duolingo’s slowed growth and its currently high price. A lack of profit is understandable given the company focused primarily on building and iterating on its product without monetizing for several years. However, a 21x revenue-to-valuation multiple is much too high for an edtech company. In the most bearish case, investors may see a company with a bloated valuation that competes in an intensely competitive market. Additionally, while Duolingo continues to grow, there’s been a slowdown in subscription revenues have slowed and paying monthly users. If Duolingo is not able to revitalize these figures, the company may struggle to reach profitability in the future.

Lastly, Duolingo’s app was removed from some Chinese app stores.. The company mentions China several times throughout its prospectus, and with China being the world’s most populous country, it’s only logical to assume that China figures to play a large role in Duolingo’s growth. Unfortunately, the Chinese government has cracked down on edtech as of late which does not bode well for the company. The combination of a slowdown in growth, its potentially largest market being restricted, and its overpriced valuation are bearish signs for Duolingo.

Duolingo has shown it can still grow and has multiple avenues for growth. While institutional adoption of its Duolingo English Test (DET) should continue to grow, Duolingo also has new products in development. During the pandemic, the company launched Duolingo ABC which is a free app focused on English literacy for children aged three to six. Additionally, the company is reportedly working on a math app for children. 

Lastly, the company has also released podcasts in English, Spanish, and French to focus on audio-only learning. Duolingo’s podcasts were released in 2017 and have had more than 70 million downloads across all episodes. The podcasts combine storytelling with language learning as a host recites a story in the listener’s native language and in the language they are trying to learn. While monetization of the podcasts is unknown, it’s clear the company has and will continue to experiment with its product offerings. Duolingo has the branding and reach necessary to touch a massive audience. 

All said, Duolingo has created an addictive language learning platform backed by strong design principles. The founders are mission-driven and have built a strong brand that looks well-positioned for continued relevance in the coming years.

Duolingo is a well-known language learning platform with massive reach and influence. The company has managed to grow to where it is based on its mission to make the best language education in the world universally available. While keeping the core experience free without monetizing the education itself has been difficult, the company has also found ways to monetize its service and bring in significant revenue. 

However, Duolingo is going public off the back of a strong 2020 and first quarter of 2021. It’s difficult to say how the company will continue to grow in a post-pandemic world, but there are favorable signs. Duolingo is led by strong founders who have built a culture based on continuous product iteration. Trends towards increased digitization and becoming a more multicultural and multilingual society should help the company remain relevant. 

However, as the company has set a rather high valuation for its upcoming initial public offering. With a revenue-to-valuation multiple of 21x, Duolingo is priced much higher than its edtech peers. Additionally, there are signs of slowing user growth, particularly paying user growth. Those signs are very concerning, as Duolingo has historically struggled to monetize its service. The company is developing new products, but if these do not find significant traction, Duolingo may see its share prices drop. For these reasons, Duolingo’s initial public offering is a Neutral Deal.

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Analysis written by Francis Vu.