1 Unstoppable Artificial Intelligence (AI) Stock Down 29% You’ll Regret Not Buying on the Decline

Artificial intelligence (AI) is a hot topic in the stock market right now, and while there’s a lot of hype, many companies are finding tangible and highly valuable use cases for the technology.

Duolingo (DOUBLE 4.69%) is the largest digital language education platform in the world, and its business was incredibly successful before the advent of AI. However, the company uses it to create exciting new features for its users and leads to new revenue streams.

Shares are down 29% from an all-time high set earlier this year. Here’s why this represents a great opportunity for investors to buy.

Image source: Getty Images.

Using AI to improve language learning

Duolingo is a mobile platform, so it puts language lessons within reach of virtually anyone with a smartphone. His lessons are gamified and interactive, which is a departure from traditional classroom learning.

In the second quarter of 2024, the platform had 103.6 million monthly active users, which was up 40% from the same period last year. This growth rate represents an acceleration from the first quarter, when its user base grew by 35%, which really highlights Duolingo’s positive momentum.

The number of users paying a monthly subscription to unlock additional features grew 52% year-over-year to 8.0 million. This already impressive growth rate could increase in the future thanks to Duolingo Max, the company’s newest (and most expensive) subscription tier.

Max offers two AI-based features: Explain My Answer, which gives each user personalized feedback based on their mistakes, and Roleplay, which allows users to practice their conversational skills with a chatbot in the language of their choice. Duolingo has been working on AI for several years, but these new features run on OpenAI’s powerful GPT-4 models, which allowed the company to roll them out faster.

Duolingo Max was launched last year and so far is only available to about 15% of active users in 27 countries. Still, it’s an important step in the company’s mission to provide a learning experience capable of rivaling a human tutor. Duolingo will steadily roll out Max to more users over time, and the company says it will reveal new information about the product at its Duocon conference next month.

Duolingo’s revenue and profit continue to grow rapidly

Second-quarter revenue rose 41% to $178.3 million last quarter, beating management’s high-end forecast of $177.5 million. The strong result prompted management to raise its full-year revenue guidance by $2.8 million to the higher end of the range, to $738.3 million.

Duolingo also reported significant progress on its bottom line. The company continues to carefully manage its costs, increasing total operating expenses by just 14.7% year over year. This helped increase net income from $3.7 million to $24.4 million.

Simply put, Duolingo is proving to investors that it doesn’t need to burn through significant amounts of cash to maintain strong growth in its business. In fact, unlike many tech companies in the consumer space, Duolingo spends very little money on marketing. It was the company’s lowest operating expense in Q2 at $20.2 million, which represented just 18% of total operating costs.

Duolingo has told investors in the past that up to 90 percent of its user acquisition is organic, meaning it comes through avenues like word of mouth and free social media posts. During Q2, the company said its organic (unpaid) social media impressions were up 190% year-over-year.

Why Duolingo stock is a bearish buy

An estimated 2 billion people are learning a foreign language worldwide, so Duolingo has a long track to grow based on its monthly active user base. Additionally, if the company fulfills its mission to provide a digital learning experience that rivals human tutors, it will offer students an unprecedented value proposition that could even lead them to replace physical lessons with the Duolingo app.

AI will be the secret to delivering this experience. Duolingo users perform more than 1 billion exercises every day, which gives the company a wealth of valuable data it can use to improve its AI features, making them more responsive and accurate over time.

Duolingo stock is currently trading at a price-to-sales (P/S) ratio of 14.7, which is almost exactly in line with its average since it went public in 2021. In other words, Duolingo stock isn’t cheap either, not expensive at the moment. , at least relative to its historical valuation levels.

Data by YCharts.

However, if the company achieves revenue of $738.3 million in 2024, as expected, that gives its stock a forward P/S ratio of 11.0 (based on the company’s current market cap of about 8 .2 billion dollars). That means Duolingo stock will need to rise more than 30% between now and the end of this year just to maintain its average P/E ratio of 14.6.

But investors buying stocks today should focus on the long term. The company is growing by leaps and bounds despite the very limited availability of its AI-powered Max subscription. As it continues to roll out, Duolingo could deliver more record results on the top and bottom lines.