Duolingo and the Attention Economy
People fundamentally misunderstand Duolingo. They assume it’s a learning app. It’s not.
The reality is that Duolingo is a member of the attention economy. This fundamentally changes the way you need to analyze Duolingo. Let’s dive in.
The (Potentially Problematic) Unit Economics of Duolingo
The freemium model is an amazing business model. It allows for greatly reduced customer acquisition cost (CAC) and let’s the free portion of their business cover the CAC. You can infer from their financial statements the significant role that subscriptions plays in Duolingo’s financials, representing 83% of total revenues. The rest of the revenue is split between other in app purchases (gems, tests, etc..) and ads. You can’t quite see the role that ads plays, but from management commentary you can infer they are in the high single digits.
It is tough to find exact churn information on Duolingo, with very little shared publicly. 3rd party estimates had Duolingo churn at 28%, which aligns with vague management commentary and their high level financial information. Versus other educational businesses, churn rates like this are exceptional and leading the educational industry.
The AI Conundrum
Duolingo stock has been beaten to hell due to AI fears. I’ve laid out the case on why these are fundamentally wrong, but I think AI is actually a benefit for Duolingo.
A core portion of Duolingo’s expenses is R&D expense and AI directly attacks its highest leverage R&D costs, especially content creation, personalization, and learning optimization.
I love finding ideas I think are fundamentally flipped. The market thinks AI is a risk for Duolingo, while I think it is an opportunity. When you see these asymmetries, I see it as a sign to dive deeper.
The Attention Economy
If you compare Duolingo to it’s educational peers, it looks like an amazing company. Better monetization, higher engagement, lower churn, etc… Unfortunately, that isn’t the true comparison for Duolingo. You need to compare them to the attention economy. When you start comparing Duolingo to Netflix, YouTube, etc… it is a different story. The gap in users is massive, the engagement is less and the track record is worse. Investing is relative, I see a ton of positives in Duolingo, but ultimately why own Duolingo when you can own the real winners of the attention economy?
A Peak Into the Future
The future of many businesses is reduced R&D as AI allows for easier building, but those costs will be quickly re-routed to customer acquisition and retention. I believe Duolingo will see increased competition in the future, but the hardest problem in business is figuring out how to acquire and retain customers. Duolingo has a proven track record of organic growth.
The core questions to me are:
- Can Duolingo continue to compound users for the next decade?
- Can they support this valuation?
I think Duolingo has a long enough track record of execution in this area, that I believe it. I don’t think AI is a major threat to Duolingo, but instead a catalyst.
Analyzing the valuation is harder. I’ve always avoided Duolingo stock due to the extremely rich valuation. Things changed quickly as Duolingo continues to grow while the market grows wary of Duolingo.
Wrap It Up
Ultimately, I think the math behind Duolingo can work. Sometimes I am liable to overthink things, but I keep coming back to the idea that Duolingo is a member of the attention economy. They are a successful business, with a strong track record. Yet, as a member of the attention economy, they are just a small fraction of the overall time
