June 29, 2021
Photo Illustration: Rafael Henrique/SOPA Images/LightRocket via Getty Images
Just in time for those hot-girl-summer trips to Ibiza, Duolingo filed its S-1 this week to kick off IPO proceedings. The language-learning app will go public on Nasdaq under the DUOL ticker. It aims to raise up to $485 million through the IPO, which would net a total valuation of $3.4 billion. Duolingo has yet to set a date for the trading debut.
Duolingo is a mobile language-learning app that offers courses in 40 languages. It averaged 40 million monthly average users for the quarter ended March 31, 2021. Around 5% of those users paid for the ad-free Duolingo Plus subscription service. Overall, the Duolingo app has garnered 500 million downloads and stands as the highest-grossing education app on both Google Play and the Apple App Store.
Duolingo's distinguishing advantage is its use of gamification techniques to encourage users to spend more time on its app. The company says it designed its lessons to be "bite-sized, on-demand and fun." It runs thousands of A/B tests on users to optimize engagement, though this product refinement strategy has sometimes alienated users (for more on that and the negging Duolingo owl, see "What could go wrong?" below).
Aside from the core language-learning product, Duolingo also administers English proficiency tests on behalf of corporations and universities. University admissions are the top use, as U.S. schools often require prospective international students to take an English proficiency exam. The Duolingo English Test, priced at $49, was purchased around 344,000 times in 2020.
Between 2019 and 2020, Duolingo's revenue more than doubled from $70.8 million to $161.7 million. Duolingo Plus was the primary growth driver in this timeframe, as the number of subscriptions rose from 900,000 in 2019 to 1.6 million in 2020. This coincided with a doubling of Duolingo Plus bookings from $72 million in 2019 to $144 million in 2020.
Duolingo has maintained its impressive revenue trajectory in 2021: Revenue for the first three months of 2021 came in at $55.4 million, which was nearly double the $28.1 million generated in the same period for 2020.
Despite the sustained revenue growth, Duolingo hasn't turned a profit. It lost $13.6 million in 2019 and $15.8 million in 2020. Perhaps of greatest concern for investors, those losses seem set to widen as it posted a net loss of $13.5 million for just the first three months in 2021.
But there are attractive economics: Duolingo's cost of revenues is low, leaving the company with a healthy gross profit. Instead, costs come largely from research and development, which represented 45% of total revenue from 2019 and 33% of total revenue from 2020. This includes costs associated with engineering, product development and design. And some variable costs could come down: Duolingo indicates efforts to boost paid user retention beyond a year, which would allow them to pay 15% app store fees to Apple and Google instead of the standard 30%.
Three themes stand out from the S-1 risks section: public perception, reliance on mobile app stores and competition.
The S-1 boasts that the Duolingo brand "has become part of pop culture, appearing in internet memes." (How do you do, fellow kids?) It bears mentioning that these memes aren't always positive, particularly as they pertain to some of Duolingo's more aggressive gamification techniques. The Duolingo owl, for instance, has become a cultural icon for its nagging reminders that prompt users to continue their daily learning streaks.
This isn't just making fun of an owl avatar. Duolingo runs the risk of garnering public backlash due to its monetization and engagement strategies.
On the operations side, Duolingo is beholden to app store policies enforced by Apple and Google, including the sizable 30% revenue cut.
Finally, Duolingo points to the steep competition and low barriers to entry in the language-learning space.
Here's how Duolingo shares were divvied up as of March 31, 2021:
Note: Those insiders are set to benefit from Duolingo's dual-class share structure. Their Class B shares have 20 votes apiece versus one vote apiece for the Class A shares the public will buy, meaning the founders and their venture backers will have effective control of the company even after it goes public.
Update: This story was updated on July 19, 2021, to include fundraising details.