Duolingo vs Spotify: What’s the better investment and why?
Which holds more long-term value: learning or listening?
In this article, we’ll walk you through our view on which company is the better investment today and why. We’ll also explore why, from an investor’s perspective, a Duolingo user is more valuable than a Spotify user.
Duolingo — A brief introduction
Duolingo is building a super-app, combining language learning, math, music and even chess in one single app. With over 130 million Monthly Active Users (MAUs) the company dominates the online learning space. Besides, it’s growing its user count by over 30% a year. They must if they want to complete their mission:
Duolingo is growing its revenue by around 40% per year, outpacing both its own and analysts’ expectations. But more important than growth alone: the company turned profitable in 2023. Today, Duolingo has a net margin of over 10%, making it one of the few companies that pass the 'Rule of 40' test.
How big is the language learning market? Well, CEO Louis von Ahn has mentioned several times the TAM is over $60 billion. With a superior product and far stronger network effects than competitors like Babbel and Memrise, Duolingo’s growth runway appears long.
Duolingo’s growth strategy consists of a mix of aggressive marketing and adding more and more courses and paid tiers to the Duolingo app. We expect Duolingo to grow by over 20% for the foreseeable future. Just like Duolingo is doing now, this growth will come from selling subscriptions.
Even though Duolingo trades at a lofty P/E of 250, with earnings growing over 100%, it could still be an interesting investment. For our analyst Bouke it already has been in the past three years, resulting him in a 300% return.
Spotify — What you need to know
Let’s jump from the learning company to the audio company. Spotify may be best known for music streaming, but there’s more. Since launching podcasts in 2015 and audiobooks in 2022, it has shifted its mission to: 'To be the world’s number one audio platform.’
While Spotify has been the most popular music in app in the world for a while, it didn’t become profitable until 2023. The compressed profits stem from the nature of the music industry: record labels hold most of the power and have the upper hand over streaming platforms. They set the licensing terms, and if a platform doesn’t agree, it simply doesn’t get the music. And without artists like Bruno Mars, Billie Eilish, or Dua Lipa, users are likely to switch to another streaming platform.
You can also see the strength of record labels in their profit margins. The chart below compares Spotify with the two biggest publicly traded record labels. Keep in mind that Spotify has over 250 million (!) subscribers and Universal and Warner have none.
Spotify kept growing its music business, but realized that at the end of the day, it retained little profit. Still, it understood the strength of its value proposition and switching costs. So, what did they do?
Expand to Podcast
Expand to Audiobooks
Fire employees
Price increases
And with enormous success:
So… How do the these two companies compare to each other?
Duolingo vs Spotify
Clearly, there are similarities between the two companies: they both are founder-led platforms that are expanding vertically and are growing nicely. Besides, their logo’s both consist of green letters ;).
By continuously adding new features to their apps, both companies are expanding their user bases and strengthening their value propositions. We believe each offers a superior product in its own category, but some key differences emerge when taking a closer look at the financials.
Profitability
When comparing Duolingo’s gross margins to Spotify’s. One thing seems clear. The costs of the product are way, way lower at Duolingo.
“Why does this matter?” you might ask. The answer is simple: the higher your gross margin, the more you can invest in sales & marketing and research & development for example. Of every $10 in revenues, Duolingo keeps $7.28 and can spend that in whatever way they want, in comparison to just $3.02 at Spotify.
Net profit margins currently sit at 11.8% for Duolingo and 7.3% for Spotify. At first glance, this might suggest that Spotify runs a leaner operation. But if you know Duolingo like Bouke does (he’s been following the company for over three years), you’ll know the story isn’t that simple. Duolingo has plenty of room to expand margins. If the company ever shifts its focus toward optimization and efficiency, net margins could easily exceed 25%
Price per user
So, as an investor, how much are you actually paying for each MAU? It’s a simple calculation: you just divide the company’s market cap by its total number of MAUs. Right now, the price per MAU looks like this:
In our opinion, the small premium for a Duolingo MAU is justified, given that Duolingo has way higher margins and perhaps a longer growth runway. Besides, as we’ll discuss at the end of this article, Spotify could be overvalued today…
Now, let’s dive into whether this price per user is justified or not…
Expected growth
As an investor today, you’re paying nearly as much per user for Spotify as for Duolingo. The big question is: Is that deserved?
The answer to that question mainly lies in two components:
Revenue growth
Net margin growth
Revenue growth
When looking at the historical growth trend, we see that Duolingo is clearly beating Spotify. In the upcoming years, that’s likely to remain the case. Especially since Duolingo’s CEO, Luis von Ahn, has indicated they expect to keep growing at over 20% annually. While Spotify benefits from massive scale and is gradually entering a more mature phase, Duolingo is still a young growth company with plenty of room to expand into new countries and subject areas.
Net margin growth
While we believe net margins could double for Duolingo (from 12% to over 25%), we won’t see margins over 15% at Spotify. This all has to do with the love-hate relationship between Spotify and the music labels.
Spotify would love to have direct relationships (and as a result higher margins) with the musicians, but the music labels won’t let Spotify do that. Otherwise, the record labels become irrelevant. Besides, the record labels offer a completely different product than Spotify does. So even if Spotify would start direct relationships with the artists, it remains a question if the artists want the (perhaps not so good) service Spotify offers them.
Which company do we prefer?
Based on what we see today, Duolingo is growing faster and has more room to increase their profitability level. Still, when it comes to long-term durability, Spotify’s moat feels stronger. We are less certain the Duolingo will be around in ten years than Spotify.
One of our analysts, Siem, experienced this himself. After a streak (the number of consecutive days you complete a Duolingo lesson) of over 600 days, he quit, and still hasn’t opened the app since. While some apps are sticky and may have a strong moat (think of certain social media or booking platforms) most lose their relevance over time. Just look at Angry Birds, Clubhouse, or Vine. The app industry is brutally competitive, and staying relevant is hard. While Spotify is technically 'just an app' too, its chances of remaining relevant seem much higher.
Let’s run a quick valuation of both companies using a scenario analysis. Of course, this won’t give us a precise answer about what the stock/business is worth. Still, we believe it’s better to be approximately right than precisely wrong.
Duolingo’s valuation
When growth slowly comes down to 20% a year, profitability increases to a net margin of 25%, and we expect Duolingo to have an exit multiple of 30 in year 10, we can expect a return of 10% a year from today’s $24 billion market cap.
Spotify’s valuation
Well, if this scenario plays out, Spotify could be dead money for the next 10 years for anyone buying/holding at today’s prices. Definitely not what we’re looking for. Sure, once Spotify matures, it might return a percentage point to shareholders (through dividends/share buybacks), but that isn’t the kind of return that gets any investor excited.
So, if you asked us: 'Which one’s the better investment?', from today’s prices, it’s clearly Duolingo. It’s not that we don’t appreciate Spotify’s value from a consumer perspective. We just see a more compelling investment case in Duolingo right now.
So, keep going with your Duolingo streaks and enjoy another one the millions of songs on Spotify, we’ll be back with another update soon!
If you have any questions regarding this article, feel free to ask them in the comments below. We’re looking forward to keeping providing you with valuable insights.
Have a wonderful day and happy investing.
The Dutch Investors
Super interesting! I’m clearly biased as a Spotify owner but there is no denying Duolingo has potential ! Love the cover art as well !