Duolingo (NASDAQ: DUOL) is an app-first language learning platform offering 40+ languages in a freemium and gamified go-to-market approach. DUOL monetizes its users through subscriptions (73% revenue), advertisements, in-app purchases, and English proficiency tests (“DET”). DUOL dominates the online language learning market, holding 67% market share with no other platform holding over 10%. The education app market faces an expected 27.5% CAGR from 2021 to 2026.
I write this post to propose a DCF-based, fundamental valuation of DUOL.
Feel free to view the full model here.
Modeling positive decreasing growth in Subscription, Advertising, and DET revenue segments yields a 23.4% CAGR from 2022 to 2030, conservatively less than the market CAGR of 27.5%. Subscription revenue, DUOL’s main cash generator, is driving this growth, making up nearly 90% of revenue by 2030 with a CAGR of 25.4%. Given the growth of Adverting and DET is relatively more uncertain, more conservative growth multiples were used.
Steady EBIDTA margin expansion is assumed from a relative decrease in COGS, R&D, and SG&A spend as DUOL matures. It's hard to tell exactly how fast the startup will slow R&D, though a 2% YoY decrease seems reasonable given the currently large spend (41% of revenue).
NWC metrics hold constant other than cash, which is projected to decrease back to 2021 levels. DUOL currently sits on a crazy amount of cash (>200% of sales) assumed to cover short-term revenue uncertainty. It seems reasonable to believe they will decrease their rainy-day funds to a normal level post 2022.
Cost of Equity is set to 10%, a typical opportunity cost of capital for most equities. Coupled with a Cost of Debt is set to 5% and a 0.987 equity-to-total capitalization ratio, we arrive at a WACC of 9.9%.
Given these assumptions and a 2.5% terminal growth rate, a $78.66 target share price is implied, a 14.7% upside from the current share price of $68.58 (at time of writing).