True "Xiaohongshu concept stock": Duolingo

"Foreign Douyin refugees" flock to Xiaohongshu, unexpectedly igniting Americans' enthusiasm for learning Chinese, and also making the language learning platform Duolingo popular in the capital market, being referred to as the true "Xiaohongshu concept stock."

Duolingo's stock surged 7% on the U.S. market on the 16th and continued to rise on the 17th. As of now, Duolingo's stock price is reported at $351.1, with a market capitalization exceeding $15.44 billion.

The significant rise in Duolingo's stock has attracted the attention of JP Morgan. The analyst team led by Bryan M. Smilek at JP Morgan released a report on the 17th, stating that one of the main driving forces behind this is its continuous innovation and user growth in the language learning field.

The report mentioned that Duolingo has expanded its video call feature to Android devices and added support for five new languages, allowing iOS devices to support eight languages and Android devices to support six languages (Japanese and Korean will be launched soon). The introduction of this feature not only enhances user experience but also significantly boosts user engagement in learning.

In addition, Duolingo has introduced expressive animations, video call subtitles, and allows the AI character "Lily" to actively initiate video calls with users. These innovations are believed to enhance the learning experience for users.

JP Morgan is confident about Duolingo's future development, giving it an "Overweight" rating and setting a target price of $400, which is 14% higher than last Friday's closing price.

The True "Xiaohongshu Concept Stock"

As China's leading social media platform, Xiaohongshu has become an important place for young people to share lifestyle and learning experiences, thanks to its strong content ecosystem and user stickiness. Duolingo, with its innovative language learning model and gamified design, has attracted hundreds of millions of users worldwide.

The two seem unrelated, yet they have created a wonderful intersection due to the "foreign Douyin refugees."

According to a previous report by the China Securities Journal, ByteDance's TikTok plans to proactively shut down its application for its 170 million U.S. users on Sunday (January 19, Beijing time), the deadline for the U.S. law "ban if not sold," aiming to show all users the impact of the ban.

In the face of the potential ban on TikTok, many American netizens have quickly turned to "Xiaohongshu" and have been rapidly "planted" with interest.

Duolingo released data on January 16, showing that from December 1 last year to January 13 this year, the number of learners of Mandarin Chinese in the U.S. increased by nearly 216% compared to the same period last year, coinciding with Xiaohongshu's rapid rise in the global App Store download rankings.

The report estimates that in January 2023, the number of Chinese learners in the U.S. was about 1 million to 2 million, and it may have now grown to 2 million to 3 million

How Much of This "Heavenly" Wealth Can Duolingo Handle?

The "traffic dividend" brought by Xiaohongshu has driven the stock price and user growth of Duolingo. Nevertheless, its future development still faces numerous challenges.

JP Morgan mentioned in its research report that Duolingo needs to continue to focus on several areas: first, as the user base expands, how to maintain user stickiness and sustained growth is a key issue; second, the rapid development of generative artificial intelligence (GenAI) and large language models (LLMs) has brought both opportunities and competitive pressure; finally, the strengthening of internet regulation may impact its marketing strategies.

However, Duolingo's management seems to be well-prepared to face these challenges. They are enhancing user experience and profitability by continuously optimizing product features, expanding language offerings, and launching paid subscription services, such as the premium subscription service Duolingo Max.

JP Morgan expects that the number of Max paid users will reach 450,000 in 2024 (accounting for 5% of total users) and 1.37 million in 2025 (accounting for 11%), contributing $45.8 million and $153 million in revenue, respectively.

As user growth continues, Duolingo's revenue is expected to reach $744 million and $975 million in 2024 and 2025, respectively, with adjusted EBITDA also steadily increasing.