Daily Stock Pick for June 22, 2023

We’ve barely scratched the surface of AI’s potential. So it’s no surprise that there’s so much excitement around it.

But as I’ve cautioned a few times before – beware the imposters and bandwagon-riders. Companies will be looking for any reason to slap the AI label on their products, no matter how tangentially related they are.

The job of this newsletter is to help you separate the wheat from the chaff, the real from the fake.

And today’s stock pick is a company that is using AI in the B2C field – setting it apart from the many companies that have mainly been applying AI in B2B.

What’s even better is that this company’s product actually improves people’s lives – instead of just enticing them to spend more money.

AI has been making a real difference in the quality of its products and the company’s addressable market has been growing. By extension, its stock price has been increasing as well.

But as you’ll see, I believe this stock could still have plenty of room to run…

Duolingo, Inc. (DUOL)

Language learning app Duolingo has long been criticized for its “freemium” model, with many questioning whether it is able to convert these free users into paid ones – the #1 challenge for such apps.

Well, while the question has yet to be definitively resolved, its latest results point toward Duolingo being able to make this model work.

In its latest quarterly results, the company revealed that it had seen a 62% year-on-year jump in daily active users to 20 million, with revenue surging by 42% to $116 million.

Duolingo’s net loss in the latest quarter had narrowed to $2.6 million compared to $12.2 million a year ago. Profitability is just spitting distance away.

Plus, the company has also been generating positive free cash flow – and growth in that arena has been impressive. Free cash flow stood at $54 million for FY 2022 (compared to less than $10 million in FY 2021). But in the first quarter of 2023 alone, Duolingo generated nearly $30 million in free cash flow.

Then there’s its AI-powered features. Duolingo currently has two AI-powered features to help its users. The first is Roleplay, an AI chatbot that users can speak with to improve their language skills. The second is Explain My Answer, which gives personalized lesson feedback to each user.

Few know this, but Duolingo has actually been collaborating with OpenAI (developer of ChatGPT) since 2021. This means what we’re seeing with the company’s growth could just be the start.

Duolingo’s stock has been impressive lately – more than doubling in 2023. Yet it’s still down over 20% from its all-time highs, and that was when the company was exhibiting much more inferior metrics. Now may be a good time to get in on this growth stock.

To your wealth,
Felix @ Ace of Investing