I’ve got a soft spot for this company. It’s great software and the management team is rooted in my alma mater, Carnegie Mellon.

We were having a family discussion last night over how extremely powerful gaming companies have become in getting people hooked into spending hours of their precious intellectual energy collecting cookies or exploding gems. Imagine if you could use those same techniques to engage people in a similar way but channel it into productive activity like learning a new language?!

Technology-driven improvements in education have been a long time coming but now that they are here they will make a profound difference over time. We’ve already students using free online resources like Coursera or EdX surpass “real” college graduates. Athletes have trained using YouTube videos and gone onto win Olympic medals without the benefit of any “real” coaching. Read more about Julius Yego.

Language learning (at least the conversational sort) is one of the areas that is poorly suited to traditional classroom education and a perfect fit with the personalized interactive experience one gets online.

Duolingo has gotten it right and seen a rapid expansion of user growth and increasing conversion rates to paid subscriptions. The company is also free cash flow positive with positive adjusted earnings.

Valuation

As with many quality growth stories, this one is coming at a high valuation. The market cap will be in excess of $4B on a base of about $300M of revenue. That’s based on the $102 pricing last night. We’ll have to see where it opens.

One curious and confounding item from the roadshow is that the company provided a target model that excludes figures for Sales and Marketing (S&M) and General and Administrative (G&A) expenses. They only provide gross margin and R&D expense in putting forth a 30-35% long-term adjusted earnings margin.

Since S&M and G&A were a combined 57% of revenue in the March 2021 quarter it’s fair to say they are pretty material to the model.

I built a quick and dirty PFV model to come up with a semblance of a price target of $145. I’d like to take some time to refine this into a fuller model that takes into account more variables but this will have to do for now.

DUOL Present Future Value Model

Other comparables in this group: Coursera ($COUR), 2U ($TWOU), PowerSchool ($PWSC)

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