Duolingo filed an S-1 form this week to begin its IPO process. The language app will trade on the Nasdaq under the ticker symbol DUOL. A trading debut date has not yet been set. We tell you what you need to know about this company and the risks it currently faces.

What’s the Duolingo business?

Duolingo is a mobile language learning app that includes a variety of courses in 40 languages. On average the service is visited by about 40 million users per month and 5% of them are paid Duolingo Plus subscribers. The app has 500 million downloads and is the most profitable educational app on both Google Play and the Apple App Store.

What sets Duolingo apart is its use of gamification techniques that encourage users to spend more time on the app. The company has sought to develop courses that are easy, fun and engaging. It also runs thousands of A/B tests on users to optimize engagement, even though this product improvement strategy sometimes alienates customers.

Duolingo not only teaches foreign languages, but also conducts English tests on behalf of various corporations and universities. In 2020, the $49 Duolingo English Test was purchased approximately 344,000 times.

Duolingo Financial Statements

Between 2019 and 2020, Duolingo’s revenue more than doubled from $70.8 million to $161.7 million. Duolingo Plus was the main driver of growth during this period, with subscriptions rising from 900,000 in 2019 to 1.6 million in 2020. It also coincided with an increase in Duolingo Plus applications from $72 million in 2019 to $144 million in 2020.

Duolingo’s momentum continued in 2021, with revenue of $55.4 million in the first three months of 2021, nearly double the $28.1 million generated during the same period in 2020.

Despite steady revenue growth, Duolingo did not make a profit. In 2019, the company had a loss of $13.6 million, and in 2020, that amount was $15.8 million. Perhaps of greatest concern to investors is that those losses will continue to grow. In the first three months in 2021, the company lost $13.5 million.

But there are also attractive economic indicators: the cost of Duolingo’s revenue is low, which gives the brand a stable gross profit. The company’s costs are mostly related to research and development, which accounted for 45% of total revenue for 2019 and 33% of total revenue for 2020. They include expenses related to product design and development.

In addition, some variable costs may also go down: Duolingo is making an effort to retain paid users for more than a year, which will allow it to pay Apple and Google 15% commissions instead of the standard 30%.

What can go wrong with Duolingo

Three main themes can be identified in the risk section of Form S-1: public opinion, dependence on mobile app stores, and competition.

Public Opinion about Duolingo

The Duolingo brand has become part of pop culture and a hero of memes. However, sometimes the Internet community mocks the company’s aggressive gamification methods. The Duolingo owl has become the hero of Internet jokes because of annoying reminders that encourage users to continue their daily activities.

Duolingo risks a negative public reaction because of its monetization and engagement strategies.

“Our brand and reputation could be negatively impacted by our actions that are seen as contrary to our own mission. For example, exclusive features for Plus subscribers or changes to the free offer,” Duolingo points out in the risk section of Form S-1.

“The preservation of our brand will largely depend on our ability to continue to provide useful, reliable and innovative products. But we cannot guarantee that we will succeed,” the company adds.

The report also stated that the company treats users “like guinea pigs for A/B testing and prioritizes short-term conversions over long-term user retention.”

Duolingo also pointed out in S-1 that more than 3,000 higher education programs recognize their English exams, including “17 of the top 20 undergraduate programs in the United States according to US News and World Report.” However, the company also warned that the reputational damage could adversely affect the willingness of educational institutions to accept the Duolingo language test.

Dependence on the App Store and Play Store

Duolingo has to comply with Apple and Google’s app store policy, which calls for a 30% commission.

“In 2020, the Apple App Store brought in 51% of app revenue and 53% of all purchases, while the Google Play Store brought in 19% and 20% respectively,” Duolingo notes in an S-1 form.

Apple and Google can unilaterally change their app store policies. They are unlikely to drastically increase commissions, but they can add other fees, change advertising terms, and change how they use or share personal information.

Duolingo main competitors

Duolingo also points to fierce competition and a low entry threshold for language learning.

“There are thousands of free mobile language learning apps on the market, provided by private companies, universities and government agencies,” the company writes.

In particular, Duolingo seems concerned about the possibility of social networking companies and tech giants Apple or Google entering the market: “These competitors can use their strong position in one or more markets and access to existing databases of potential users and their personal information. This would give them a competitive advantage over us,” the brand notes.

Who owns Duolingo shares

As of March 31, 2021, the company’s shares were split as follows:

  • NewView Capital Fund – 16.3%,
  • Louis von Ahn, co-founder, and CEO of Duolingo – 12.2%,
  • Severin Hacker, co-founder, and CTO of Duolingo – 12.2%,
  • Union Square Ventures – 11.5%,
  • CapitalG – 11.1%,
  • Kleiner Perkins – 8.5%.

Duolingo shares will have a two-class structure: Class B securities will give holders 20 votes, while Class A shares will have only one vote. Thus, the founders and venture capitalists will have control over the company even after it goes public.

Duolingo reviews

  • “Duolingo constantly makes me feel like a failure,” the app user wrote. – I feel like you can trace my depression back to Duolingo.
  • The company said that more people in the U.S. are learning languages on Duolingo than in all high schools in the country combined. The number of users who have chosen certain languages, such as Irish and Hawaiian, exceeds the number of speakers of those languages worldwide.
  • “Most importantly, these apps keep us from forgetting that learning a new language is a full-time job. However, it is often tempting to immerse ourselves in play instead of learning. I’ve noticed that I sometimes replay the very first lessons just to keep my lane of activity in the app. Breaking the rules in these kinds of self-improvement projects doesn’t hurt anyone but yourself,” reasoned writer Eric Ravenscraft.

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