¶ Overview
Welcome back, everyone. Today on the Joseph Carlson Show, we have Duolingo, a stock that I first started buying just this week. I highlighted on my YouTube channel a few days ago. We're going to be looking at Duolingo, kind of revisiting this stock and the timeline of
events. We'll be looking at things like when I first started doing research on this company, what characteristics caught my attention, when did I first start making videos on it, as well as responding to some of your comments on my previous video. A lot of users left some interesting feedback, some of its criticism, some of it's just nice comments. I'll be responding to some of those comments as well. Now, of course, we have some other news to get into.
We have Uber that also reported earnings this week. The CEO of Uber also went on to CNBC to talk about Waymo, and he mentions one particular statistic about Waymo that is incredible. We'll be going over that. And then we have Texas Roadhouse, one of my larger positions, reporting earnings this evening. I'll give some thoughts going into this earnings of whether or not I think the cinnamon butter rolls will continue to
outperform. So like always, we have a lot to do in this episode, a lot to go over.
¶ Duolingo Review
And we start things off with Duolingo. Duolingo is a stock that I highlighted in a recent episode, and it's the newest holding in My Portfolio. I bought $10,000 of this stock just this past week. Now the holding resides in the Story fund, which is the smaller of my 2 portfolios. It's a little bit more concentrated and growth focused. And this portfolio has overall just had outstanding performance, outperforming the QQQSCHG, the S&P 500, mostly because of Netflix.
I put a lot of effort and energy into this holding. It's compounded like crazy. That's where the majority of games come from. But there really hasn't been any slackers in it. Amazon, I think has done the the weakest of the bunch and it still hasn't done bad. We're up $42,000 in Amazon and the rest of the holdings have they've they've held their weight.
When we look at Duolingo, I looked at a lot of different companies of what I wanted to enter into this portfolio and I decided upon, out of all the different ones that I was looking at, that Duolingo was my favorite risk adjusted reward addition. So I bought $10,000 of that stock this past week. Now to a lot of people, this may have came across as out of left field or out of the ordinary.
In fact, one of the most common pieces of feedback I got after buying Duolingo, making a video about it, was that a lot of viewers didn't understand why I was buying the company. Even after explaining the thesis, many people were just perplexed by it. They're confused. There's many comments like this one. This is the first pick I truly don't understand with 260 thumbs up. So lots of people seemingly very confused by my purchase of Duolingo.
And I think it's important before we jump into the earnings that I can help explain this purchase a bit more and the timeline of me buying it. When we look at recent videos, we have one going back three months. This is May 5th, so three months ago. I have a video highlighting top five quality growth stocks to buy now. Now the fifth one on this video is Duolingo. This is what I say about Duolingo in this video a few months back. Now, this one may seem like a weaker company.
A lot of people have their opinions on the application, whether or not they like using it, a lot of anecdotal and various opinions on it. But keep in mind those are the same type of opinions and anecdotes that you get for companies like Spotify and like Netflix. Some people say I don't like Netflix shows or I don't like Spotify. I'd rather have Ale Music. Very similar situation with Duolingo and similar to those companies as well. This one works with millions and
millions of people. It's a subscription company, it's a bit of entertainment, but it's mostly focused on the educational side. In that video, I go over just a few minutes of Duolingo and express my interest in the company, how it actually fits a lot of my investment criteria. Everything that I saw when I was doing deeper and deeper research raised my conviction in the stock.
It didn't lower it. When I looked over the characteristics of this company, this is how I summarized it the way that I saw it. Duolingo is the undisputed leader in digital language learning with unmatched brand recognition and global scale. You know about Duolingo? You probably don't know about even the second or third place or 4th place options. Most people don't even know what they're called. So at least with Netflix, you know about Amazon Prime Video or Peacock or Paramount?
With Duolingo, most people don't even know the competitors. They are the the by far dominant one in their industry. It is a gamified freemium model that drives massive user acquisition at a low cost, converting efficiently to paid subscribers. It follows in a very similar structure as Spotify. You have the free tear that just allows people to sign up frictionless. You can Join Now and get an account for free. Then when you get into the ecosystem, you really like it.
You might get converted to the paid tear if you're convinced enough and a certain percentage of their free tear users are continually convinced to upgrade the paid tear. So you have this nice funnel of first free, then paid. Paid are what really makes some money. User data fuels AI driven personalizations, reinforcing a self improving loop of engagement and learning outcomes. User retention is near social
media levels. This is something that people don't understand about Duolingo is that they look at it as basically like just a video game or a random app. But Duolingo has some of the highest retention of any app in the world. It's not quite what social media is, but it's getting closer and closer to those levels. Social media levels means that you log on and use it every single day, and Duolingo now has 10s of millions of daily users.
Daily use is social media levels that becomes an ingrained part of your life when you use something every day. It is a very large addressable market with an estimated 2 billion people currently learning English. They're growing into these massive verticals that have long, long runways of potential growth. The total addressable market is huge. And then just an added bonus, the company's still led by the founder of the company. He's very, he's certainly not
focused on the short term. He's not going to squeeze profits out of it, out of the short term. When I looked at the overall investment thesis of Duolingo, I really liked what I saw diving in more to the financial metrics. I also saw it as a very high retention, high margin, very good cost structure subscription business. Those are the type of companies that I typically focus on, ones that have huge amounts of
reoccurring revenue. They're very reliable, they're scalable, they have huge total addressable markets. And of course, selling at a reasonable price. Now when we look at the price, a lot of people will squabble or be hung up on the PE ratio. And while it's true that Duolingo had a very high PE ratio, it's also true that Duolingo is growing incredibly fast. And anytime I look at a PE ratio, you have to match it with the growth rate of the company, with the cost structure, with
the operating leverage. Those things are part of the price to earnings growth ratio. They're part of the long term expectations. When I looked at the overall valuation of Duolingo and looked at the overall growth assumptions, I saw is undervalued, not overvalued because if we look at it here, just making a couple assumptions
at $440.00. So this is $100 more than I bought it. If we plug in a 20% free cash flow per share growth rate over the next five years, which I believe is completely achievable, the company's growing it's top line revenue above 30%, around 35%. A company growing top line revenue with great cost structure and margins can certainly achieve 20% free cash flow per share growth. Then if we just assume a 2% free cash flow yield, we get a 13% annualized return for the next 5
years. Now let's say our desired return is 19%. That moves us to a starting price of $330, meaning that when I plugged in the same assumptions just a couple days ago at a price of $330 per share with 20% free cash flow per share growth and a 2% yield, that gave me a 19% compounded return over five years. Even after it moving up 27% today or whatever, it's moved up, that still gives me a 12 to 13% return. So even after this move, I still don't believe by the numbers
that Duolingo's overvalued. I think it's less undervalued than it was before, but I still believe it's undervalued. When you dive into the fundamentals of the company, especially this most recent quarter. When we look at this, for example, on a quarterly basis, this is just last quarter, the revenue was $252 million. Again, this is like a $20 billion company. So we have revenue growing 41.4%, so about 42% revenue growth and revenues of $252 million.
If we look at this on a trailing basis, this is what it looks like, 40% growth, $885 million of revenue. Now the amazing thing is out of that 885 million, if we look at subscription revenue, this is just the part that's from subscribers, not advertisements or anything that's not reoccurring. This is now at $734 million. So the huge majority of their revenue is coming from subscriptions. This number grew by 47% year over year. Massive growth.
On a mostly subscription based company, you can see these growth curves and this is part of the valuation. So when you're factoring in the price to sales or the PE ratio or the free cash flow, you have to factor in the rate of growth. Most companies are not growing by 40%. Most companies are not subscription based. Most companies don't have 70% gross margins. All of that should be factored into the valuation. When we look at the daily active users, this is another metric
that is just incredible. Now this is the one that they focus on possibly the most is getting people to use the app every single day because that's the engagement. That's similar to a social media company is using it every single day. Having it be part of your habit, it went up even after a great Q1. So from Q4 of last year to Q1, they gained a lot of daily active users, about 6,000,000. The growth rate from Q1 to Q2 wasn't as much, but it still grew.
And year over year it grew 39%, almost 40%. Once again, one of the only weaknesses in this report was the monthly active users. These are people that have logged on at least once in the past 30 days, and it had a sequential decline quarter over quarter. After looking into this, there's a couple things that explain this. First of all, the Q1 jump to Q2 is often the smallest throughout history.
That's typically been the smallest jump is Q1 to Q2Q4 to Q1 is typically a big step up and that's how it is throughout history. So naturally you have these bigger jumps from Q4 to Q1 as people are starting the new year, they want to learn a new language, you know, they sign up for Duolingo. So a lot of that happens in Q4 to Q1 now in 2025. Q One in particular, that was a massive step up because they had a very unique marketing
campaign. The Duolingo bird died and everyone had to revive it. It went super viral. It got so many new users in a single quarter because it was by far their most successful marketing campaign. It was just an ultra viral social media campaign. So they gained an unnaturally large amount of users in this quarter to quarter and then they gave up a few of those users that were less committed. This is a very healthy thing.
We've seen it happen with Netflix before during COVID when they had unnatural growth, they shed off some users, but then the long term trend took over. They continued to gain subscribers over time. You can see the same type of trend over time. This was an unusually good Q1 because of that marketing campaign. But if you factor that in, it looks like good organic growth from Q4 of last year to Q2 of this year. The most financially important part of this company is the paid
subscribers. Over time, they make up for around 80 to 90% of the total revenue of the company. So the huge majority of money, free cash flow, earnings per share, everything is driven by these paid subscribers. When you subscribe to Duolingo, typically you sign up for like a whole year. You just do an annual plan. They have family plans as well. You can have multiple people use them so they have a lot of lock in. Once you sign up, you have it for a full year.
It's not that expensive of a membership. Most people renew it over time and the paid subscribers continues to grow at an incredibly fast pace going up 36,000,000, going to 10.9 million where the last quarter was 10.35. Around every 30 days are gaining 200,000 subscribers and these are some of their most dedicated people using the app everyday. All the KPIs and business
fundamentals look really good. You see continued growth, strong engagement, increases in daily active users increases and paid subscribers. There's overall some shedding in the monthly active users, but the growth trend continues. When we look at some of the financials, this also looks better and better. Now the free cash flow growth is really fast. It's growing at 55%. So again, when we're looking at free cash flow yields, we're making growth assumptions of the future.
You have to factor in what you think this company will do over the next five years. It's growing 55% today. I believe it can grow above 20% per year for the next five years. In fact, I think those assumptions are rather conservative. The earnings per share is also growing super fast, up 73% year over year. If you look at it just on a quarterly basis, it's up around 78%. So you have earnings per share just shy of doubling year over
year. That cuts down the PE ratio from 100 to 50 to 25 really fast if you keep growing at these rates. And then to add on to that, this is a company that has no debt. They just have cash piling up on their balance sheet. All the efficient free cash flow they're generating has to go somewhere. They're just putting it in cash for the time being. Now, this was one where there is a lot of, I would say mixed reception.
A lot of people confused if I was buying it, leaving kind of comments where they're like perplexed and I wanted to go
¶ Responding To Comments
through and just respond to some of them. So I have a little bit of AQ and a here I'll respond to some of these comments. One of the comments that I received a lot and I decided to just screenshot this one because it it exemplifies a lot of the thoughts people had after watching that video Is this is the first pick? I truly don't understand my reaction to the people that are saying this is did you watch the video?
I made a pretty in depth video going over the entire summary of the company and why it fits in with my investing philosophy and just saying that you don't understand it doesn't really give me anything to work with. You don't understand what part of it? Duolingo is a subscription based company. It has a huge total addressable market. It's growing very fast, has great cost structure, very high margins.
It has a product that has a big total addressable market, big verticals to grow into, founder LED, and it was selling at a valuation that if you incorporate growth was completely reasonable. So I don't know what people are saying when they don't understand it, like they're completely baffled by this pick. What is so bad about Duolingo? What what is the problem here? We have some other comments here
that are a bit more specific. Steven says, I think people are surprised because it doesn't fit well with what companies you buy. You have the sort of portfolio that Dev Kantasaria wouldn't mind. He'd make his changes, no doubt, but he'd approve of a lot of it. Ask Dev the first thing he'd change, probably the language game thing or bicycle game thing. If you still owned it. It's no FICO, that's for sure.
Hope it does well for you. So this is kind of a, a feedback that Duolingo is not as high quality as companies like FICO. It's not as high quality as the type of companies that Dev Kantasaria own. The first thing I want to highlight is I don't I like Dev Kantasaria. I do like him. I respect him a lot. I think he's a great thinker. He does great analysis on companies and I like his philosophy.
There's certainly a lot of similarities, but I'm not Dev Kantasaria and in fact, I have a lot of disagreements with Dev Kantasaria. He did sell Amazon at the lowest point over the past five years and I thought that was a huge mistake. I bought more of it at the exact time that he was selling Amazon. Although Dev Kantasaria and I agree, I think that into it's a great company. MasterCard, S&P Global, the credit rating agencies.
There's also some companies that I think we just disagree on. Dev Cantisari has gone on the record saying that Costco is not a quality company in his opinion. I would argue the exact opposite. I think Costco is going to be around longer than most companies on planet earth generating enormous amounts of money through their membership model. I think Costco is is one of the most flawless, best business models in the world. Dev does not and he said it in
in different podcasts. And then some of the companies that I've made the most amount of money on, ones that I I really made about half the gains in my total portfolio or more. Netflix, Google, Amazon, Texas Roadhouse are all ones that Dev has said that he hasn't owned or wouldn't own. Those are all companies that fit outside of the mold of Dev Kantasaria companies. He would never buy a Netflix. I don't think he's ever going to buy that company.
He's outwardly spoken against big tech saying they spend too much on CapEx. So he's not buying Google and you're not going to catch him buying Texas Roadhouse. Which Texas Roadhouse has been one of my best performing positions. I think it's far underrated as a compounder. The company is incredibly well positioned and Texas Roadhouse many people may criticize as having a lot of competition, having a smaller Moat, but Texas Roadhouse doesn't have regulatory issues like FICO.
It doesn't have disruption issues like Google with LLMS Texas Roadhouse has been an incredibly insular company focusing on executing its business model and growing rapidly. But again, these are the type of companies that don't fit well with the Devcantasaria type of portfolio. And then you mentioned that Duolingo's know FICO, that's for sure. Well, Fico's not immune to different disruptions or
problems as well. Even though FICO has a dominant position in their market on credit rating, they did make a huge mistake. Management exercised too much pricing power too quickly and that has been a huge problem for the stock. If we look at FICO today, this is Devcantasari's largest holding by far. It was a 30% position, so over double the size of any holding in My Portfolio. It's down 31% year to date. In the past year, it's down 20.6%.
FICO has been getting crushed recently because of regulatory scrutiny on the company that they asked for by their incredible price hikes in a short amount of time. So again, even though I I really like Dev Kantasaria, I've continually been very complimentary of them. It's not going to be the case where I buy every company that he buys. If he sells one, I sell it. That's not how I operate. I'll use his research, I'll look at what he does, but I'll have my own investing philosophy.
Another commenter said, I was hoping you picked Shark Ninja. Shark Ninja is an awesome company. I really, I really like this one. I respect the CEOA lot. I think it's really cool what they're doing. Just innovating over and over again, coming out with really creative products. But there's just no subscription model there. There's no recurring revenue. They have to continually innovate and innovate and innovate. I'd rather own the Costco that they sell.
Shark Ninja. Think about Costco's job and Shark Ninja's job and think about who has an easier job. Costco that just takes whatever products are popular and puts them on their shelves and has really good customer service, treats their members well. Or Shark Ninja that's constantly engineering, doing new designs, refining, manufacturing, and dealing with all sorts of returns. Whenever Costco has a return, they just send it over to the
manufacturer. Costco has a much easier job than Shark Ninja and Costco has a recurring revenue through their membership model. So I I just rather own a company that's at steady instead of 1 like Shark ninja. The reason I buy Duolingo over Shark Ninja Again, if Duolingo had no recurring revenue, no subscribers, I wouldn't own the stock. Another common one, this one had over 100 up votes. Says Duolingo has APE ratio of 169. It's a lot.
Perhaps you see the value of it, but for me, it's a pass. Again, I think these comments are fine. If you look at the company and you think it's expensive, that's fine. And it's never my goal to convince everyone to buy the companies that I do. I don't care if you buy them or not. Frankly, it's not a sales pitch. If I wanted to buy just the most popular stocks to get an audience through them, I'd be on the Tesla bandwagon or on the Palantir bandwagon, right?
I'd be buying the companies that I think have the biggest audience. There's very little content ever made about this company. I simply bought it because I wanted to buy it. Now when we look at Duolingo's valuation in particular, again, it's easy to get hung up on these Nosebleed PE ratios. You look at it and you go, wow, the trailing PE is 173, but APE ratio without the corresponding growth rate is giving you one part of the recipe.
It's like saying, hey, I want to sell you a car for $50,000 and you say What Car is it? And I say, I'm not going to tell you it's just $50,000. Can you make a good decision with only knowing what you're paying but not knowing what you're buying? That's what you're doing. If you just look at APE ratio, you know the price tag, but you don't know whether or not you're getting a good deal. You don't know if you're getting a good deal or a bad deal just
by the price tag alone. You have to know what you're buying, how fast it goes, what is the car you're buying for 50,000? If you're buying a used Toyota Corolla, that's probably not the best deal. If you're buying a Lamborghini, it's probably a decent deal. So knowing what you're buying is important. When we look at the trailing PE ratio, that's true that it looks expensive, but the PE is growing by roughly double year over year, meaning that the PE ratio will get cut in half in 12
months. And with this type of company that has a lot of operating leverage, even though the revenue growth is growing really fast, the earnings growth is likely to grow at a much faster pace. So if Duolingo grows 40% revenue growth, the earnings growth is probably going to be closer to 60% or 70% because they have that nice operating leverage. So I think the earnings growth is going to be well in excess of 50% over the next couple of
years. That'll make the high PE ratio today look very cheap in the future. Finally, the last thing that I'll highlight is a lot of people had a very similar thought. And I think it's one of the first things you think about the company is that AI translation tools like a Zoom translating you or having your phone translate to you into different languages is going to kill Duolingo.
We have different people saying the future will have people speaking whatever language they want and having AI translated for them in real time. And it's already happening now. I think right there in this first sentence, you highlighted a problem with this thesis. This is already happening and Duolingo's still growing. Right now we have more AI translation tools, more language translation tools. We have it on our phone. We've had it for a long time.
There's things that will immediately translate you into a different language. Yet Duolingo's still growing in number of users, daily active users and revenue growth by 40%. And they have for years. AI has been around for years and it continues to grow. And I believe the reason why is because if you asked most people why they're using Duolingo, why they're learning a new language, it's not because of a lack of AI translation tools. That's not why they're using it.
People want to learn new languages, to exercise their brain, to expand their knowledge, to be able to live in a different culture, to be able to communicate themselves directly to people without a piece of technology or phone in between their face. So even though AI translation tools may have some effect on the margin, I don't see them having a meaningful impact on the company long term.
¶ Texas Roadhouse
They do not address the core reason the majority of people learn new languages. Now moving on, we get to a different subject here, which is Texas Roadhouse reporting earnings. Aftermarket closed today. The stock price is currently at 184. It's floated around just under $200 for quite some time now for about the past year. But overall, the performance of this one has been really good. We zoom out five years and you
can see the full picture here. It's actually performed as well as FICO, in fact, beating FICO over the past five years now. So you have a restaurant company beating out FICO for five years. You also have a restaurant company beating out Google for the past five years. We look at Google's performance in five years, 163 versus 200% for Texas Roadhouse. That doesn't factor in dividends. We can go to Microsoft. Microsoft is another company.
We zoom out five years, Texas Roadhouse has outperformed it. We go to let's take a look at Meta. Meta is a great company, great compounder. Let's take a look at this one. Past five years, 191, not quite as good as Texas Roadhouse, and again, not factoring in dividends, which Texas Roadhouse pays hefty dividends? What other ones are we leaving out here? Amazon. It's not even close. Amazon has been a laggard over the past five years, only going up 41%. If you bought it during the dip,
you got a better deal. But Amazon isn't close to Texas Roadhouse. If we look at Netflix, did Netflix do well over the past five years? Again, this is one that if you bought it in the dip, it's done incredibly well, but buying it five years ago, it's up 140%. All these companies beat out the S&P 500. None of them beat out Texas Roadhouse. So when people look at this, they see it as highly competitive and they see it as having poor cost structure and
low margins. But one of the things that they don't outline with this type of company is it's also highly insulated. For example, if you invest in Google, you're competing with disruptive risks like Chachi, BT, huge dynamic changes in technology. You have huge changes in servers and cloud hosting and security and all this stuff at Texas Roadhouse, you really have no technological disruption risk. It doesn't matter what technology, what AI, what model's going to get invented in
the future. As long as people like tasty food and great service and a nice environment, this company will continue to thrive. And they do so continually by focusing on those basics. They call it legendary service and legendary food. They give you great service and great food. They have a great environment. They treat their staff really well. They have a great incentive structure for their staff and
for their management. When I look at Texas Roadhouse, in the history of investing in this business, I bought around $35,000 into the position. Now it's an $80,000 position, $46,000 of it being gains. And it's paid a lot of dividends along the way as well. I don't expect explosive growth at this point, but I think they're going to continue expanding overtime. Now finally, we get to Uber, which also just reported earnings. The stock is flattish after earnings, but they're up 40%
¶ Uber and Waymo
year to date. So still great performance from this company, and it's growing really quickly. We have the CEO of the company also going on the CNBC to give a comment specifically on autonomous vehicles. And I think this part's really applicable to not only the Uber investor, but also the Google investor with Waymo. We're working with Waymo in Austin where we expanded our operational domain. We launched in Atlanta and it's
been a great launch. The average way MO in Atlanta is busier than 99% of drivers in Atlanta as well. And we're working with players like We Ride in Abu Dhabi, Wave in the UK, Baidu outside the US and Neuro and Lucid here in the US. So we're very excited about the autonomous trends. I think before I was on, we were talking about AI. This is physical world AI and we think it's going to be a huge trend going forward.
Did you catch it? The statistic he gave out, We have Waymo's in the exact same area as Uber drivers. Waymo is outperforming 99% of Uber drivers. Now I'd like to know the 1% that's outperforming the Waymo. Like who is, who is that guy out there Ubering literally all day, morning and night, never taking a break, never eating. I, I want to know who that is because that's incredible. But it shows the effectiveness of Waymo.
You have one Waymo vehicle and they're outperforming 99% of people because they can work any time period. They're not taking breaks. All they have to do is recharge or refuel. And you can just send them and you can just send them immediately from one ride to the next to the next. And right now in the US, Google has the lead on this Waymo has the lead. They're expanding the fastest both with and without Uber. Now, the CEO here, Dars, asked about Tesla and their efforts in
the robo taxi. Here's his comments on Here's his comments on Tesla. Oh, I think it could be a competitor, could be a partner and and you know, when you're talking about trillion dollar tams, there will be no winner take all in this marketplace. It's great to see Tesla in the market. They're taking their time and they are making sure that they're expanding in a Safeway. So he says that we could be a competitor or we could be a
partner. He's still open to partnering with Tesla. When you partner with Uber, you're handing over the direct control of the relationship of the customer to Uber, no longer to your technology, you're handing it over to Uber. And that way it pits you against Uber to some degree, even if you're a partner with them.
For example, if Tesla partnered with Uber across the board and Uber found a better partner that could build vehicles cheaper or offered a better mix of how much revenue they share, then they could switch over to that supplier. By handing over that direct relationship with the customer, it makes the autonomous vehicle maker and designer, the Tesla and the Waymo, become more of a commodity that can easily be swapped out while Uber maintains the key relationship and they're
the aggregator. The aggregator is the position you want to be in the position of having the direct relationship with the customer. And I believe over time, with Waymo trying out both ways of partnering with Uber and doing it alone, they may gravitate to also just running things themselves if they can, if they have the distribution, if they can make it work, that's in the end the more profitable route.
So we'll see how this continues to work out for Uber as they try to aggregate everyone into their platform, while these technology companies are a little bit more reluctant to do so. That's going to be it for this episode. See you in the next one.