All about Investing

1 Growth Stock Down Over 60% to Buy Right Now

Related categories

Many quality tech stocks have been tossed aside amid the broad market sell-off, but thats an opportunity for patient investors.

The global education technology industry topped $106 billion in value during 2021, and that's expected to more than triple to $377 billion by 2028. As technology continues to advance, more learning will shift online, making education far more accessible, especially in countries that are typically underserved.

Language education is a subset of the industry, and Duolingo (DUOL -0.20%) has taken a leadership position in what it estimates is a $60 billion opportunity. But the company is looking to apply its innovative approach to learning to other subjects like literacy and math, setting up a major potential phase of new growth.

Duolingo just reported its full-year 2021 earnings, and it revealed strong results across most key metrics. Yet over the last few months, its stock has declined over 60% from its all-time high amid the broader tech sell-off. Here's why it's time for investors to consider jumping in. 

Image source: Getty Images.

Leading the language business

Duolingo estimates over 1.8 billion people are currently learning foreign languages worldwide, and it has served as many as 500 million of them through its mobile application. It makes Duolingo the most downloaded language education app globally, and its success is attributable to its gamified approach to learning, making it fun, interactive, and even a touch competitive. 

This has translated into a willingness to pay among its user base and created a platform that advertisers find highly valuable. The Duolingo app has soared to the top of the charts to become the highest-grossing education app in both Apple's App Store and Alphabet's Google Play Store.

In 2021, Duolingo's paid subscriber base soared 56% year over year to 2.5 million users, representing an all-time high of 6% of its total 40.5 million monthly active users. That's a sixfold increase from its 1% paid-subscriber penetration in 2018 when the company first introduced subscriptions. That growth is partly attributable to innovative new packages like the family plan, which is designed to make the subscriber base more engaged and sticky.

A unique strategic advantage

In stark contrast to other technology products, Duolingo says 90% of its growth in 2021 was organic, through word of mouth. Sales and marketing is often one of the largest expense categories for software companies that generate revenue from subscriptions, but Duolingo's organic growth means it spent just 24% of its revenue in that area during 2021. As a result, the company can allocate money to more valuable line items like research and development -- 41% of revenue -- to improve the user experience.

The development of brand new lessons for non-Roman languages with complex characters like Japanese, Hebrew, and Arabic was one result of the company's R&D spend in 2021. Additionally, Duolingo is integrating artificial intelligence into its app to offer users personalized feedback when they make mistakes.

Duolingo's revenue soared 55% to $251 million in 2021. Over 70% of that was subscription-based revenue with the remainder consisting of advertising, in-app purchases, and English proficiency tests.

Why Duolingo stock is a buy now

The company has offered solid guidance for 2022 -- its $337 million revenue outlook (at the midpoint) would represent 34% growth. And while Duolingo still doesn't expect to turn a profit this year, it should inch closer to a break-even result on an adjusted EBITDA basis with a loss as small as just $1 million.

Investing in the business is crucial as Duolingo continues to build scale, so losses could continue for the foreseeable future. But investors shouldn't be discouraged, because the company has a gross margin of greater than 72%, so it has optionality when it comes to managing costs. As Duolingo continues to grow financially, it could reduce R&D, or even marketing spend, and allow those savings to flow through to the bottom line.

But in the meantime, Duolingo highlights enormous opportunities in emerging markets like India. In 2020, the company issued an estimate that between the years 2017 and 2022, over 500 million people would be accessing the internet for the first time in that country thanks to affordable mobile-data plans. And the benefits are already flowing with Duolingo experiencing 400% growth in 2020 in India alone.

After the steep declines of the past six months, it's a great time for investors to add it to their portfolio to ride these long-term growth trends. 

Leave your comment