The story of the broad market is much the same as it has been in recent weeks. To wit, rotation continues across several industry groups while the major averages remain stuck in a lateral range. Thankfully, there are still quite a few attractive stocks to be found in this environment, including Duolingo (DUOL), asserts Mike Cintolo, editor of Cabot Growth Investor.
There’s no denying that range-bound markets can be dull, but they’re not without their attractions. In fact, sideways markets tend to be ideal for stock picking, as there are always strong stocks to be found in an otherwise neutral environment.
This week’s list includes some standout names across a bunch of industries, with several of them displaying the type of relative strength we like to see in a choppy market environment. Our Top Pick is DUOL, an app-based foreign language learning platform whose offerings should lead to years of rapid growth both from new users and from converting current free users.
Want to learn a foreign language? More than 16 million people are using Duolingo to do just that, which represents a hefty rise of 62% for the business from a year ago. Duolingo is an app-based offering of free daily lessons in 43 languages, mostly for English speakers looking to improve their skills in another tongue, or for foreigners wanting to learn English.
While lessons are free and don’t restrict users from continuing to advance (in exchange for ads on the app), the business mainly runs by getting enthusiasts to pay for an ad-free experience called Super Duolingo. The paid tier comes with other features to make lessons even easier, like the ability to review your mistakes. It saw 67% growth in 2022, to 4.2 million subscribers.
In addition, users who are likely to become paying subscribers (namely once-daily users), as well as users of the app for seven days in a row, were up 27% and 54%, respectively, in Q4. Management says the second-language market is a $60 billion opportunity with lots of potential growth to build on last year’s $430 million revenue (up nearly 50% from a year ago), most of which came from subscriptions.
Growth should also come from a move into providing formal language testing services, including for students who need to demonstrate proficiency, as well as using AI to power a new, higher-priced subscription tier, Duolingo Max. Management says revenue growth this year should look a lot like last year, and Wall Street expects the full-year top line to rise 34% to around $500 million.
Recommended Action: Buy DUOL.
