Duolingo: the owl’s superpowers

$DUOL is poised for Exponential Free Cash Flow Growth

The content of this analysis is for entertainment and informational purposes only and should not be considered financial or investment advice. Please conduct your own thorough research and due diligence before making any investment decisions and consult with a professional if needed.

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While working on this deep dive, I was also reading 7 Powers: The Foundations of Business Strategy by Hamilton Helmer, which examines seven key strategies that create enduring competitive advantages. The experience has been fascinating, as I found that nearly all of these "powers" are present in Duolingo’s business model.

Duolingo's mission is to develop the best education in the world and make it universally accessible. Its products are designed to be smartphone-native, bite-sized, and on-demand, combining advanced data analytics, AI, and world-class design to make learning engaging, effective, and accessible to all. With courses in over 40 languages and more than 100 million monthly active users, Duolingo tackles the core challenge of learning—maintaining motivation—through gamification features and thousands of A/B tests that optimize user engagement and retention.

Duolingo employs a multifaceted approach to generating revenue. The primary source is subscriptions to its premium service, Duolingo Plus, which offers an ad-free experience, offline lessons, unlimited lesson attempts, and advanced features like AI-powered calls through its Duolingo Max tier. Advertising also plays a significant role, providing revenue from ads shown to free users without additional cost to them. In-app purchases, such as buying "hearts" or "lingots" for extra chances or customization, contribute further. Additionally, merchandising and certification tests diversify revenue streams.

However, this deep dive focuses on the subscription segment, where Duolingo has placed strategic emphasis. By converting its massive free user base into a stable, recurring revenue source, the company strengthens its growth trajectory and underscores its core business strategy.

Let’s now dive into Duolingo’s superpowers and examine how its flywheel operates to sustain and scale its competitive edge.

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Index

1. Counter-positioning

2. Brand

3. The Duolingo Flywheel

4. Network effect

5. Retention Challenges

6. Process power

7. Leveraging Generative AI for Growth

8. Expanding the Scope Beyond Language Learning

9. My concern about Duolingo

10. Conclusion

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1. Counter-positioning

Duolingo’s counter-positioning advantage is exemplified by its innovative freemium model, which has fundamentally reshaped the language-learning landscape.

This model allows users to access the platform's content for free while offering a subscription for premium features. It lies at the heart of Duolingo's success, enabling massive user growth. As evidenced by its steadily increasing share of the global language-learning market—over 30% year-over-year—Duolingo has achieved a scale that traditional competitors struggle to match.

By offering its core service for free, Duolingo has democratized access to language education, capturing a broad audience that competitors like Rosetta Stone and Babbel cannot feasibly reach without undermining their own high-cost, premium business models. While these competitors do offer some kind of free tier or trial, their offerings are typically limited in functionality and cannot compare to the comprehensive and engaging free experience provided by Duolingo.

This strategy not only attracts millions of users but also creates a significant barrier for competitors. For incumbents to compete with Duolingo's free offering, they would have to cannibalize their premium revenue streams, risking damage to their brand value and profitability.

Duolingo’s freemium approach forces competitors into a dilemma: either dilute their premium offerings or cede the free-tier market to Duolingo. This is the essence of counter-positioning—an advantage built on a strategy that rivals cannot easily replicate without incurring substantial harm.

2. Brand

Duolingo’s growth strategy is not only efficient but also deeply rooted in the strength of its brand. As CEO and co-founder Luis von Ahn notes in the Q3 earnings call,

The reason we can be so efficient with marketing... is because our free users basically act as our marketing engine. They tell their friends.

This word-of-mouth virality is fueled by Duolingo’s obsession with delivering an exceptional user experience, which has cultivated strong affinity and loyalty among its learners. These satisfied users naturally become enthusiastic advocates, spreading the word to friends and family.

Duolingo’s brand has also become a cultural force. It has been embraced in internet memes, featured in sketches on late-night comedy shows, and gained massive traction on social media. As shared by Duolingo in the last annual report, On TikTok, for instance, #Duolingo has accumulated over 4 billion views, while the company’s official account continues to garner attention from the press. This widespread recognition and resonance with pop culture further amplify its reach, as also proved by the interest over time on Google search.

This strong brand presence enables Duolingo to grow its business primarily through organic means, relying on the virality of its free tier and its cultural relevance rather than extensive paid user acquisition. This is evidenced by the declining percentage of revenue spent on Selling, General, and Administrative (SGA) expenses, coupled with consistently robust revenue growth.

By combining a beloved user experience with a vibrant and recognizable brand, Duolingo has created a self-sustaining growth engine that competitors find difficult to replicate.

3. The Duolingo Flywheel

Duolingo’s flywheel operates as a self-reinforcing engine of growth and innovation, driven by its expansive user base, advanced technology, and efficient resource allocation. Two interconnected mechanisms—the learning flywheel and the investment flywheel—work in tandem to enhance the user experience, attract learners, and fortify Duolingo’s competitive edge.

The learning flywheel begins with Duolingo’s massive user base, completing over a billion exercises daily. This activity generates the world’s largest dataset for language learning, fueling advanced AI and machine learning models that personalize lessons to each user’s needs. Enhanced engagement and learning outcomes encourage more users to join, expanding the dataset further. Duolingo’s robust A/B testing framework amplifies this cycle, running hundreds of experiments each quarter to refine features like Leaderboards, which gamify the experience and boost engagement. This continuous iteration improves user satisfaction, driving organic growth through word-of-mouth referrals.

The investment flywheel builds on this momentum by directing resources into innovation rather than costly marketing. Duolingo’s free tier and strong word-of-mouth referrals minimize the need for paid user acquisition, freeing capital to advance the platform. Revenue from paid subscriptions funds improvements in AI, data analytics, and shared infrastructure, enabling scalable innovations across products. AI tools, for example, predict learner performance to tailor exercises, while shared infrastructure ensures seamless deployment of new features across offerings like language learning, math, music, and literacy. These enhancements drive higher engagement and subscription conversions, perpetuating the cycle.

Together, these flywheels form a powerful feedback loop. The learning flywheel attracts users and boosts engagement through data-driven personalization, while the investment flywheel channels resources into innovations that enhance the platform and draw in even more learners. This dynamic not only accelerates Duolingo’s growth but also strengthens its competitive moat, making it increasingly challenging for competitors to match its scale, technology, and cultural impact.

4. Network effect

The effectiveness of Duolingo’s flywheel is clearly demonstrated through the network effects it has cultivated over the years. This is particularly evident in the steady improvement in paid subscriber penetration—the percentage of Monthly Active Users (MAUs) who convert to paid subscribers—as shown in the graph.

Duolingo’s ability to convert its freemium users into paying customers has consistently improved, adding to the already significant growth in MAUs over time. This combination has resulted in an impressive, exponentially growing paid subscriber curve.

The larger the user base, the more effectively Duolingo can both expand that base and monetize it.

These network effects not only drive growth but also reinforce Duolingo’s competitive moat. As the user base grows, the platform’s data advantage and monetization capabilities become increasingly difficult for competitors to replicate, further solidifying its market leadership.

5. Retention Challenges

As of March 31, 2021, Duolingo reported in its Form S-1 that approximately 40% of annual plan subscribers from 2018, 2019, and 2020 renewed their subscriptions after 12 months. For monthly subscribers, the renewal rate over the same period was about 9%. These modest retention figures reflect the inherent challenges in Duolingo’s business model, where users can easily switch platforms or abandon their learning goals altogether.

Recognizing these challenges, Duolingo employs a range of strategies to improve subscriber retention, focusing heavily on gamification, psychological engagement, and personalization to foster user stickiness.

The ratio of Daily Active Users (DAU) to Monthly Active Users (MAU) is a critical indicator of user engagement and app stickiness.

The rising DAU/MAU ratio signals that more monthly users are interacting with the app daily, directly reflecting the success of retention initiatives.

Here’s how this trend highlights the effectiveness of Duolingo’s retention strategies:

1. Increased Daily Engagement
   Features like streak systems and the "Friend Streak" encourage users to log in daily to maintain their progress. This drives a higher DAU count, fostering habitual app use and daily engagement.

2. Enhanced User Retention
   By making the experience more social and competitive through features like leaderboards and friend streaks, Duolingo motivates users to return frequently—not just for learning but for the enjoyment of interaction and competition. This shifts casual users into regular ones.

3. Customization of Learning Experience
   With the launch of Duolingo Max, the platform leverages Generative AI to create a highly personalized learning journey. Features like "Explain My Answer" provide tailored explanations based on users' mistakes, helping them understand and correct their errors. Additionally, the "Roleplay" feature simulates real-world conversations, offering context-based language practice. This level of customization ensures learning is engaging and relevant, encouraging daily use by showcasing direct progress in areas where users need improvement.

4. Validation of Gamification
   The improving DAU/MAU ratio underscores the success of Duolingo’s gamification elements. Users actively engage with features like streaks and rewards, turning learning into a dynamic and immersive activity rather than a passive experience.

5. Feedback Loop for Improvement
   High daily engagement generates vast amounts of user data, which Duolingo leverages for A/B testing and continuous optimization of the user experience. As the DAU/MAU ratio rises, the platform’s ability to refine its strategies and features grows, creating a virtuous cycle of improvement.

6. Community and Accountability
   Social features, like the "Friend Streak," create a sense of community and mutual accountability. Users are motivated to maintain streaks when they see their friends doing the same, reinforcing consistent app usage through peer influence.

7. Sustainable Growth
   A rising DAU/MAU ratio indicates that user growth is not fleeting but sustainable, driven by high engagement rates. This ensures long-term success by making the app’s value proposition compelling enough to reduce churn.

Summarising, Duolingo’s ability to address retention challenges is reflected in the positive trend of its DAU/MAU ratio. By leveraging gamification, social interaction, data-driven optimization, and AI-powered personalization, the platform not only attracts users but also keeps them coming back daily. These strategies ensure users find consistent value in the app, creating a robust foundation for long-term growth and engagement.

6. Process power

Process power, in the context of technology and business, refers to the ability of a system or organization to consistently and efficiently handle, analyze, and utilize large volumes of data to drive decision-making, enhance user experiences, and improve operational effectiveness. Duolingo exemplifies this concept through its exceptional capacity to continuously optimize and scale its platform while improving the operating margin. Despite significant investments in R&D to further develop the platform, Duolingo’s operating margin turned positive in 2024, with trends suggesting exponential growth in the years to come.

With over a billion exercises completed daily, Duolingo has amassed the world’s largest language-learning dataset, which powers its AI-driven personalized learning at scale. As CEO Luis von Ahn stated during a recent earnings call:

The number of tests that we're running per quarter is increasing...every test that we run has about a 50% chance of succeeding. And by succeeding, I mean that it did what we wanted it to do, like increasing whatever metric we wanted.

This relentless focus on experimentation drives constant platform improvement, enhancing user engagement and learning efficacy while creating a self-reinforcing loop of innovation. As a result, Duolingo’s free cash flow per share has been rising rapidly since 2021, with no signs of slowing down.

7. Leveraging Generative AI for Growth

The rapid advancements in generative AI, coupled with declining costs, further bolster Duolingo's free cash flow trajectory. Matthew Skaruppa, Duolingo's CFO, highlighted this during the Q3 earnings call:

Over the last 1.5 years, we've seen an amazing acceleration in terms of the speed of content that we can add. A lot of it has to do with AI...it's not just that it's cheaper to add the content...we can create certain pieces of content so fast that these are things that just we couldn't do before.

This innovation accelerates content creation while reducing costs, reinforcing Duolingo’s ability to expand its offerings and user base efficiently.

8. Expanding the Scope Beyond Language Learning

Duolingo’s management has expressed confidence in achieving sustained growth, with DAUs projected to grow by approximately 50% and revenue by over 25% for the foreseeable future. Notably, this forecast primarily reflects the language-learning segment, leaving significant upside potential from newer offerings like math, music, and literacy courses.

As Luis von Ahn explained in the Q3 earnings call:

Over the longer term, we expect other subjects to start helping, too. So this is language learning, but we expect that math and music are going to start contributing more and more over the next few years.

The company’s ability to apply its product-focused, mobile-first, gamified approach to a variety of subjects will determine whether it remains a strong investment opportunity or evolves into a multi-bagger.

9. My concern about Duolingo

After uncovering overwhelmingly positive aspects of Duolingo’s business, I encountered a significant red flag that warrants close consideration: customer feedback and its potential impact on the brand’s long-term value.

While Duolingo's app store reviews are overwhelmingly positive, its Trustpilot score tells a different story, sitting at 1.7 out of 5 compared to Babbel’s 4.3 and Rosetta Stone’s 2.7. It's worth noting that there often seems to be a significant gap between app store reviews and Trustpilot ratings, as dissatisfied users appear more inclined to leave feedback on Trustpilot. This trend is observable with other tech companies, such as Spotify. However, what struck me most was not Duolingo's Trustpilot score in isolation but its sharp contrast with Babbel, a direct competitor.

A deeper dive into Trustpilot reviews reveals the following recurring complaints:

1. Lack of Comprehensive Grammar Explanations: Many users criticize Duolingo's reliance on repetition rather than explicit grammar rules, which can result in a superficial understanding of the language.

2. Repetitive and Ineffective Learning Methods: Users often find the app’s repetition of phrases and lessons demotivating and less effective for meaningful language acquisition.

3. Monetization Practices: There is significant discontent regarding aggressive ad placement in the free version, the introduction of a heart system limiting lesson attempts unless users pay, and an overall prioritization of engagement over effective learning.

4. Poor Customer Service: Users report difficulty in resolving account issues, bugs, or subscription concerns, citing a lack of responsive customer support.

5. Quality and Accuracy of Content: Concerns have emerged about inaccuracies in AI-generated material, which may impact content quality.

6. Community and Interaction: The removal of community forums has reduced opportunities for collaborative learning, frustrating many users.

7. Perceived ‘Woke’ Agenda: Some users object to the inclusion of diverse representations, such as same-sex couples, non-binary characters, and discussions on inclusivity, particularly in early literacy content. These users view it as unnecessary or ideological, sparking concerns of political polarization.

The first six critiques primarily address user experience and educational methodology, offering actionable insights for Duolingo to evolve and better serve its diverse audience. Given Duolingo's focus on innovation and improvement, I am optimistic that the company will address these areas if they align with enhancing its financial performance.

However, the criticism regarding a perceived ‘woke agenda’ poses a unique challenge. While inclusivity and diversity are essential for preparing learners for a global society, framing these efforts as ideological risks sparking polarizing political debates. Unlike issues of usability or content quality, this critique touches on cultural sensitivities that could alienate segments of the user base and harm Duolingo’s reputation.

Navigating this terrain requires Duolingo to maintain sensitivity, avoiding any perception of indoctrination or unnecessary extremism. By focusing on its core mission of accessible language education, the company can foster a broad, positive community while steering clear of cultural conflicts.

I will be monitoring this issue closely. Should any signs of escalation emerge that threaten the brand or user base, I will not hesitate to exit my position.

10. Conclusion

Duolingo ticks all the boxes on my investment checklist:

• a strong competitive moat

• promising growth potential

• a healthy balance sheet with a positive net financial position

• positive and rising free cash flow.

It stands among the elite stocks worthy of a place in my portfolio.

As a shareholder, I am closely monitoring the performance metrics that reinforce its competitive edge, as well as the contribution of new offerings to its growth trajectory. Successfully diversifying its platform could propel Duolingo from a leading language-learning app to a dominant player in gamified education across multiple domains. This diversification holds the key to unlocking long-term value and solidifying its position as a trailblazer in the edtech space.