Shares of the world’s largest education app, Duolingo (NASDAQ: DUOL), were down 14% this week as of 2:30 p.m. ET Thursday, according to data provided by S&P Global Market Intelligence.
The main reason for this decline came from a Jefferies analyst highlighting that Duolingo’s daily active user (DAU) growth slowed to 37% in June.
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Analysts expected 44% growth in DAUs for the company’s second quarter, but the data shows it’ll be closer to 39%, prompting the adverse reaction from the market.
Duolingo learns about decelerating DAU growth
While 30 days’ worth of disappointing DAU data isn’t bad in and of itself, it extends a worrying trend. Over the last five months, the company’s DAU growth declined from 56% in February to 53% in March, 41% in April, 40% in May, and finally 37% in June.
This deceleration is far from a death knell for Duolingo’s stock. But the market may be justified in lowering the company’s valuation until it sees improving data.
Image source: Duolingo.
Even after this drop, the company trades at 106 times free cash flow, including stock-based compensation.
However, following this decline, I may find myself buying more Duolingo shares soon, thanks to its promising growth optionality.
Far from just a language learning app, Duolingo has multiple potential growth outlets, like:
Adding to its courses, as it has already done with ABCs for children, math, music, and now chess.
Building upon its standardized test offerings, such as its Duolingo English Test (roughly 10% of sales).
Growing the advertising revenue from its non-subscriber tier (around 6% of sales).
Incorporating artificial intelligence (AI) into its offerings, such as its video chat with Lily.
Though its days of 50% hypergrowth may be in the past, Duolingo’s longer-term growth story is still in its early chapters.
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Josh Kohn-Lindquist has positions in Duolingo. The Motley Fool has positions in and recommends Jefferies Financial Group. The Motley Fool recommends Duolingo. The Motley Fool has a disclosure policy.
