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Markets might be at record highs, but that doesn’t mean all stocks are. Here’s one that I think is worth considering right now for a Stocks and Shares ISA.
Two concerns
Duolingo (NASDAQ:DUOL) is the global leader in digital language learning. But since May, its share price has fallen 41%.
This appears to be due to two main reasons. First, investors are worried about rising competition from ChatGPT and Google Translate (which has released a practice mode). Second, the stock’s forward price-to-sales ratio is still around 14. So it was very expensive before.
If the first concern is right, and Duolingo sees falling subscriber growth due to competition, then there might be significant risk here. I expect a lot of disruption from AI in future, so the firm could become a victim if it doesn’t keep innovating.
Already benefitting from AI
Fact is though, we see no evidence of disruption yet. In Q2, the language learning firm reported that daily active users grew 40% to 47.7m. And it expects full-year bookings to grow 32% (higher than previously expected).
Moreover, Duolingo was already an AI-based company before ChatGPT arrived. Its internal machine learning model, Birdbrain, uses algorithms to adjust lesson difficulty, predict user mistakes, and optimise vocabulary reviews.
Meanwhile, Duolingo’s CEO Luis von Ahn is no stranger to computer science and AI. He invented reCAPTCHA, the system used to protect websites from spam and bots. Ironically, he sold this to Google before co-founding Duolingo!
The company is also leveraging generative AI advancements to massively boost productivity. In April, it announced that it had used the tech to create 148 new language courses, more than doubling its current offering.
This was the largest increase in content in Duolingo’s history, and massively expanded its total addressable market. For example, speakers of 15 European languages like French, German, Italian, and Spanish can now learn Japanese, Korean, and Mandarin.
Meanwhile, speakers of Japanese, Korean, Mandarin, Vietnamese, Indonesian, Thai, and other Asian languages can now learn all of the top seven non-English languages. Previously many of these learners only had access to English.
Developing our first 100 courses took about 12 years, and now, in about a year, we’re able to create and launch nearly 150 new courses…This launch reflects the incredible impact of our AI and automation investments, which have allowed us to scale at unprecedented speed and quality.
Luis von Ahn
A bigger vision
Some investors see Duolingo as just a silly language app, with no real moat. But the company is also seeing success with its music, maths, and chess courses. It aims to eventually offer many other subjects.
In future, I can see people having to retrain a lot more due to AI job disruption. Duolingo could become the go-to education platform for this, as it offers a freemium model (no upfront costs).
Users only subscribe once they get serious about a subject (I’m currently a Duolingo Max subscriber). And learners can now add their Duolingo Score to LinkedIn profiles as a way to show their language proficiency.
As mentioned, the stock is still quite pricey. But the firm is already profitable and boasts a very healthy 34% free cash flow margin. I recently bought the dip, making it one of the top holdings in my SIPP/ISA portfolio.
