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Google Buying Duolingo: A Match Made In Heaven (NASDAQ:DUOL) | Seeking Alpha

Conceptual hand writing showing Learn A New Language. Business photo showcasing Study Words other than the Native Mother Tongue

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what prompted this article?

i have been an avid user of duolingo, inc. (nasdaq:duol) daily for more than 860 days starting in May 2021, and I don’t plan to stop using it. Since I started using it, I have gained significant mental benefits while improving both my Chinese and Spanish.

Reading: Google buying duolingo

At the same time, I have been using google (throughout the article we will use google (nasdaq:goog), (googl) to represent alphabet inc.) quite actively, both as an advertiser and as a regular user, the same as the 60 % of the population of this planet. I recently started using Google Ads again for my own business and a non-profit I’m involved with that has a total monthly advertising budget of over $10,000; I now better understand the power of google ads.

Although Duolingo has been trying to use advertising as a source of revenue, IMHO they have been doing a very poor job. In my 2+ years of daily Duolingo use, I have yet to receive an ad that intrigued me enough to click on it. On the other hand, the google ads I get on google search and/or youtube are very related to my interest and I click on them frequently.

This stark contrast between Google’s advertising capabilities and Duolingo’s relatively poor advertising performance led me to consider Google buying Duolingo. Google would then capitalize on its advertising expertise and relatively large advertiser base to make a successful and profitable acquisition.

On a lighter side, mostly in jest, we can’t forget that alphabets are the foundation of languages ​​and google’s parent company needs to have a presence in the language learning business.

abstract and thesis on paper

This article presents Google’s rationale for trying to acquire Duolingo. A key part of the rationale is the similarity of company cultures: the employee reactions, business models, mission statement, and vision statement of both companies are quite similar, although they operate at different scales.

The reasons and benefits of Google’s acquisition of Duolingo are then presented along with detailed synergies between the two companies.

Then Duolingo’s dominance among its competitors is presented. however, the analysis of why duolingo has this dominance can be the subject of another article. The article then goes on to explain how Duolingo’s valuation would result in a price of over $200 per share.

The article concludes with what can go wrong with this potential acquisition.

Google and Duolingo Logos

Created by Author

source: made by the author from the logos of both companies

google business model

according to its last 10-q for the first quarter of 2022, md&a section, google’s revenue comes from the following sources:

  • google services
    • google advertising
      • google search & others (google search, gmail, google maps, google play)
      • youtube ads and youtube properties
      • google network (admob, adsense, google ad manager)
      • google play
      • devices and services (fitbit wearable, google nest, pixes phones, …)
      • no youtube ads (subscriptions to youtube premium and youtube tv)
      • other products and services
      • google cloud platform
      • google workplace (gmail, docs, drive, calendar, meet…)
      • other business services
      • health technology
      • internet services

      during the last quarter, only the google services segment was the profitable segment, while the other two segments (google cloud and other bets) incurred a net loss, according to the following chart:

      Segment Operating Results

      Alphabet Q1-2022 Financials

      From the above, it’s clear that while Google is trying to expand into other areas, search remains its heart and soul.

      Google’s corporate mission is “to organize the world’s information and make it universally accessible and useful.” Google’s corporate vision is to “provide one-click access to the world’s information.” Andrew Thompson provides a very good discussion of Google’s mission statement and vision statement in the Panamore Institute Business Management Publications. His analysis demonstrates the power of these statements.

      duolingo business model

      duolingo’s mission is to develop the best education in the world and make it universally available. Duolingo was launched in 2012 and has since become the world’s leading mobile learning platform. With over 500 million downloads, the company has organically become the world’s most popular way to learn languages ​​and the highest grossing app in the education category on both Google Play and the Apple App Store.

      Strategic Initiatives

      Duolingo Investor’s Presentation

      duolingo identified their mission as: “we are here to develop the best education in the world and make it universally available. our global team works together to make language learning fun, free and effective for anyone who wants to learn , wherever they are.”

      You will notice that being profitable is not one of Duolingo’s goals, and this may explain why Duolingo is not yet very successful in monetizing their 50 million monthly active users to over 3 million subscribers and not monetizing their users. from an advertising perspective.

      both companies are not looking for profit as their mission: is that ok?

      Not seeking profit as a key objective isn’t necessarily a bad thing, and in fact it’s a commendable approach, at least according to Jim Collins and Jerry Porras’ bestselling book “Built to Last”. In it, they compared a set of “visionary” companies against the set of “comparison” companies in the 20th century, and found that “visionary” companies never had profit as their primary goal. Surprisingly, these “visionary” companies were several times more profitable than the comparison companies.

      Visionary and Comparison Companies

      Built to Last

      I firmly believe that the approach both companies are taking of not putting profit as their primary goal is what has made them and will continue to make them successful. It reminds me of the adage: if you run after money, it will run away.

      Is it really a “match made in heaven”?

      there are many synergies between google and duolingo; this section presents my thoughts on why this pairing is “made in heaven”.

      Both companies rely on both advertising and subscriptions as their main sources of revenue. Although most of Google’s revenue comes primarily from advertising, the company is moving in ways quite aggressive towards more stable subscription-based models. These include YouTube Premium, YouTube TV Subscriptions, Google Cloud, Google Workplace, Health Services, and Internet Services. The situation is reversed at Duolingo, where Duolingo subscription revenue is five times higher than advertising revenue. The charts below show the sources of revenue for both companies in the most recent quarter ending March 31, 2022.

      Duolingo Q1-2022 Financial Results

      See also: Investing in Clubhouse

      Duolingo Q1-2022 Financial Results

      Alphabet Q1-2022 Financial Results

      Alphabet Q1-2022 Financial Results

      Both companies have similar missions, visions and strategic directions. As shown in the previous section, both companies have a mission and vision that focuses on improving the lives of their users. both companies appear to have similar cultures; Comparing the work cultures at Google and Duolingo shows a remarkable similarity. such a similarity would make integrating duolingo employees into google a relatively easy exercise.

      duolingo has an incredible ad revenue stream that you can’t tap into. as mentioned above, duolingo’s ad revenue accounts for less than 15% of its total revenue. With 50 million monthly active users, MAU, this represents less than $0.25 per subscriber (compared to the worldwide average annual revenue of $46.28 per user, ARPU, for Facebook/Meta). this shows the great opportunity that duolingo has not yet taken advantage of. google, with its advertising expertise, can significantly increase this number.

      Both companies rely on artificial intelligence in their operations. We all know that Google is the world leader in artificial intelligence and that AI is used in almost every division of the company. google has its own artificial intelligence division with a vision:

      At Google AI, we’re conducting research that advances the state of the art in the field, applying AI to products and new domains, and developing tools to ensure AI is accessible to everyone.

      duolingo also implemented AI in its courses to analyze bugs and modify course delivery to suit user requirements. As an avid Duolingo user, I can see how the app learns from my mistakes and adjusts course delivery accordingly. bernard marr has a very good article on using ai in duolingo posted on forbes. while ai is actively used in duolingo, i think google’s ai split may make duolingo’s use of ai even more noticeable than it currently is.

      google may use its knowledge about its users for targeted advertising. most of the ads i find on duolingo are google ads through the google network. These ads are not targeted and are linked to cookies from the sites I visited. On the other hand, when I watch a video on youtube, the ads seem very specific to me. The probability of clicking on youtube ads is much higher than clicking on duolingo ads. having targeted advertising, which google can provide, is what would increase duolingo’s arpu.

      cross-marketing advertising with existing google advertisers can provide a very large customer base for duolingo advertising. finding advertisers is one of the biggest challenges for businesses that rely on advertising for revenue. This will most likely be a challenge for Duolingo, so they use Google’s ad network, which pays a tiny fraction of their potential ad revenue. on the other hand, as a division of google, duolingo would attract advertisers who already advertise elsewhere on google.

      synergies between duolingo and google translate. google has a wonderful tool for translating between languages. the database behind this feature is something that can be interpreted as an overlay with duolingo. however, I would consider these two products to be complementary; both databases can be merged to create a single, more comprehensive language database.

      google has the relationships to spread the use of duolingo in the main classroom. google classroom is one of the main tools for managing classrooms and this is a relationship that duolingo does not have. Google may provide Duolingo for free, which enhances the appeal of Google Classroom, or it may make Duolingo an optional offering for Google Classroom. In any case, cross-marketing between Duolingo and Google Classroom would increase the profitability of both Google divisions.

      google already knows the founder of duolingo. the founder of duolingo has a history with google. Luis von Ahn, PhD previously sold two businesses to Google when he was 20 years old. the first one is google image tagger and the second one is recaptcha. This relationship above is very interesting, which puts Google in the best position among its competitors to acquire Duolingo. Luis von Ahn is the type of person who would add a lot of value to Google. Personally, I think if he works for Google, he could be the company’s next CEO after Sundar Pichai.Duolingo Going Public

      Duolingo Blog by Luis von Ahn

      source: duolingo blog; duolingo is now a public company by luis von ahn

      The above is just a list of possible synergies that would make Google consider acquiring Duolingo. I’m pretty sure there are other synergies that would only be known internally at google and duolingo.

      duolingo competition

      The question someone may be asking right now is why would Google buy Duolingo instead of another competitor? To better answer this question, let’s explore how Duolingo leads the language learning software industry. first, duolingo is the least expensive among its competition as shown in the following table:

      company

      undiscounted cost per user per month

      duolingo

      $6.99

      hellotalk

      $6.99

      tandem

      $6.99

      memrise

      $8.49

      visit ling

      $9.60

      See also: &quotThe Simpsons&quot Half-Decent Proposal (TV Episode 2002) – Jon Lovitz as Artie Ziff – IMDb

      busuu

      $9.99

      monthly

      $9.99

      rosette stone

      $11.99

      lingodeer

      $14.99

      handle languages

      $17.99

      babbel for companies

      $19.99

      source: compiled by the author from various sources

      Furthermore, Duolingo has the most subscribers and dominates the language learning software industry. The graph below shows that Duolingo has nearly twice as many subscribers as all of its major competitors combined.

      Language Learning App Revenue and Usage Statistics

      Business of Apps

      duolingo’s dominance has made it a very attractive acquisition target for google. Given Duolingo’s current capitalization ($3.3 billion at the time of this writing), I think Google needs to make a move ASAP.

      A detailed comparison of Duolingo’s functionality with its competition is beyond the scope of this article and may be the subject of another article.

      duolingo review

      To evaluate Duolingo, I started with the 2021 financial statements and the latest 2Q 2022 results. Adjustments were made to the specific line items in the financial statements to get the full 2022 financial projection. I then used the traditional method of discounted cash flow, using net income before taxes and before stock-based compensation as a proxy for free cash flow.

      To arrive at the 2022 projection, I made the following assumptions:

      • I assumed the quarter-over-quarter user growth rate was 6%, resulting in a 26% CAGR by 2022. This 26% is marginally higher than the growth rate year-on-year achieved in the last quarter. 23%. I believe that the growth in the number of duolingo is a justifiable conservative number as users will continue to grow with the continued improvements to the platform and the prevalence of duolingo and the leading language learning tool.
      • I assumed that the ad revenue per user will be $6.86 per mau. I believe this number is still relatively low compared to what other companies earn (eg, Facebook/Meta annual ad revenue per user is $242.28 in North America and $46.28 worldwide). i chose $6.86 as 1/8 of facebook’s annual arpu for the rest of the world outside of north america, europe, and asia, and i consider that a very conservative figure.
      • increased the ratio of paid subscribers to maus from 6.8% to 8%. Duolingo is now focusing, quite aggressively, on converting non-paying users into paying users, and this conversion has shown an increasing trend. I think 8% is a very conservative number given the low cost of duolingo and the relatively low attrition duolingo experiences.
      • I set the expense growth rate to 25%. I think this growth rate is very high (very conservative). most of the expense (course development) is mostly incurred, and additional users do not have a significant variable cost associated with them.
      • the hurdle rate was set at 12%. this number came from the capm model with a risk-free rate of 3%, a market rate of 9%, and a stock beta of 150%.
      • I assumed the net income growth rate to be 25% in 2023, 20% in 2024, 15% in 2025, 10% in 2026, and 5% in 2027. These conservative rates are much lower than the 41% revenue increase reported in the 2022 first quarter financials .
      • perpetual growth from 2027 was set at 3%. 3% is lower than the average GDP growth rate of 3.9% in the second half of the 20th century, and I think it’s a conservative number.

      Based on the relatively conservative assumptions above, the company’s valuation came in at $8.5 billion. with 40 million shares, we’re talking about a valuation of $212. clearly a lot of assumptions are being made here, and you might want to play around changing them and see what the result would be. I am making my valuation spreadsheet available for download.

      Valuation Spreadsheet

      Created by Author

      according to this analysis, google can offer to buy duolingo for around $212, but not much less than the all-time high of $204. google needs to act very fast, otherwise it would lose the opportunity to dominate the language learning market, and a competitor could beat it and acquire duolingo.

      what could prevent this deal from happening?

      While Google’s acquisition of Duolingo makes a lot of sense from both companies’ perspectives, certain events could derail this deal. These events include:

      • google decides to acquire another competitor less expensive than duolingo or with more compatible technology.
      • google decides to build its own language learning software based on its google translation platform.
      • another company makes a move to acquire duolingo; microsoft (msft) or meta (fb) may be potential bidders here.
      • duolingo is asking a much higher price than google is willing to pay. This will most likely happen if the stock market experiences a very aggressive rally.
      • Due diligence reveals certain issues that are not acceptable to Google; these issues may be related to technology, employee relations, finances, marketing strategy, or any other issue.
      • regulators may stop the acquisition; this is quite unlikely, but anything is possible nowadays.

      The more I research this topic, the more convinced I am that the above events will not materialize and that Google will acquire Duolingo.

      conclusion

      duolingo, the world leader in language learning solutions, is an amazing company that is a perfect fit to be a division of google. the synergies between both companies could not be greater, and both businesses would greatly benefit from this acquisition.

      Because of the synergies and potential growth, Google would need to offer a price of more than $200 per share (more than double the current price). however, this number can increase significantly if there is a bidding war from another competitor, possibly microsoft or meta.

      Before making a decision to buy or sell any of the companies, you should conduct your own due diligence.

      See also: The Midas List 2022: Return Of The Top Female Investors

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