Duolingo: An Unexpected Benefactor From the TikTok Ban

The looming threat of a TikTok ban has caused many social media stocks to surge as they are perceived benefactors that would presumably gain TikTok users who get locked out of the platform. While TikTok continues to ride the wave of uncertainty even with a 75-day extension granted by President Donald Trump, some companies in the computer and technology sector are already benefitting with or without the ban. Popular language learning platform Duolingo Inc. (NASDAQ: DUOL) has been a key benefactor just from the threat of a TikTok ban.

American Users Desperately Trying to Learn Mandarin to Use RedNote

According to TechCrunch, 700 million TikTok users have migrated over to RedNote, also known as Xiaohongshu, another TikTok-like popular Chinese social video platform. Additionally, American users are also switching over to the Chinese platform. To understand the default Mandarin language on the platform, they have also opted to learn the language using platforms like Duolingo. This is evidenced by Duolingo disclosing that their app has seen a 216% year-over-year (YoY) increase in new Mandarin learning in the United States, with a "sharp spike" in mid-January ahead of the TikTok ban. Duolingo attributes this directly to TikTok based on its “How did you hear about us?” survey for new users selecting TikTok as their response.

What Does This Mean for Duolingo's Earnings?

The migration of the "TikTok refugees" to Duolingo’s platform has resulted in a 36% spike in its U.S. downloads as of Jan. 3, 2025, across both Alphabet Inc. (NASDAQ: GOOGL) Google Play and Apple Inc. (NASDAQ: AAPL) App Stores surging it up from the top 40 apps to #20 as of Jan. 15, 2025. CNET has ranked Duolingo as the top language learning app for 2025. Duolingo gamifies language learning, offering experience (XP) points, Lingots (virtual currency), badges, achievements, and rewards for completing interactive lessons. They even have leaderboards for rankings where users can compete with friends and other learners. The company has over 575 million registered users as of November 2024.

Duolingo Was Already Crushing Earnings; Will Q4 Be a Blowout?

For its third quarter of 2024, Duolingo reported an EPS of 49 cents, beating consensus estimates by 14 cents. Revenues surged 39.9% YoY to $192.59 million, beating $189.19 million consensus estimates. Paid subscribers rose 47% YoY to 8.6 million. Daily active users (DAU) rose 54% YoY to 37.2 million. Monthly active users (MAU) rose 36% YoY to 113.1 million. Net income grew to $23.4 million, up from $2.8 million in the year-ago period. Adjusted EBITDA was $47.5 million, up from $22.5 million in the year-ago period. Operating cash flow improved to $56.3 million, up from $37.7 million, and free cash flow (FCF) rose to $52.7 million, up from $33.5 million in Q3 2023.

Duolingo issued upside guidance for Q4 2024 revenues of $202.5 million to $205.50 million versus $201.4 million consensus estimates. The surge in TikTok users should boost its DAU and MAU, but it may actually be reflected in the Q1 2025 release.

Gen-AI Feature Video Call Rollout for Duolingo Max

Duolingo CEO Luis von Ahn commented, “In Q3, we announced new GenAI-powered product enhancements that are transforming the learning experience on Duolingo. The biggest announcement was our new Video Call feature within Duolingo Max, our highest subscription tier. This feature allows users to practice conversation skills through video calls with our purple-haired teenage character, Lily, in a low-pressure environment. Lily also remembers past interactions, like my love for tacos or my recent trip to New York. This makes the experience feel more personal and brings our characters to life.”

DUOL Stock Bull Flag Breakout Attempt

A bull flag pattern is comprised of two parts. First, the underlying stock forms the flagpole, which is a steep run-up in the stock price, usually at a 45-degree or higher angle. The flagpole completes when the stock forms its peak. The flag is formed on the parallel descending trendlines comprised of lower highs and lower lows. The bull flag triggers when the stock surges through its upper descending trendline and past the peak of the flagpole.

DUOL formed a flagpole peak at $378.48 swing high on Dec. 5, 2024. A parallel channel formed comprised of a descending (falling) upper trendline resistance and parallel descending lower trendline support to form the flag. The bull flag attempt was triggered when DUOL surged back up through the daily anchored VWAP at $329.59 and above the upper trendline resistance. However, shares peaked at the consensus price target area, causing the daily RSI to slip to the 47-band. (Fib) pullback support levels are at $306.35, $291.71, $273.06, and $249.53. 

DUOL stock’s average consensus price target is 8.14% higher at $355.36, and its highest analyst price target sits at $425.00. It has seven analysts' Buy ratings and seven Hold ratings. The stock has a 3.63% short interest.

Actionable Options Strategies: Bullish investors can consider using cash-secured puts at the Fib pullback support levels to buy the dip. If assigned the shares, then writing covered calls at upside Fib levels executes a wheel strategy for income.