Sprechen Sie Growth? How Duolingo Became A Hot Stock In 2023, Plus 99 More Mid-Cap Winners

Duolingo has tripled this year, standing out in a corner of the market that still trades at a discount collectively compared to its larger peers.

While the resurgence of megacap stocks like Microsoft, Apple and Amazon has been responsible for much of this year’s market rally, the world’s favorite language learning app, which has a market cap of only $9.9 billion, has trounced nearly all of them.

Duolingo (DUOL) shares have gained 230% this year, fueled by hyperfast revenue growth that accelerated at the onset of the pandemic and hasn’t stopped. Since going public in July 2021 and reporting financials going back to 2019, its sales have grown every quarter, with $484 million in revenue in the last 12 months 43% higher than the previous year. It also netted $6.5 million in profit in the last two quarters, its first profitable quarters as a public company. Tens of millions of users make the addictive app part of their daily routine, clicking on the ubiquitous wide-eyed owl named Duo on their phone screens inviting them to learn more than 40 languages.

“What they really do well is motivation,” says Kirsty Gibson, an investment manager on Baillie Gifford’s U.S. equities team, which invested at Duolingo’s IPO and has amassed a 12.5% stake now worth more than $1 billion as its largest shareholder. “Ultimately learning a language is learning a language—it’s not like you’re reinventing the different words that people have to learn, but they’re reimagining the way in which you’re engaging people.”

Computer scientist Luis von Ahn and his graduate student Severin Hacker, who both earned doctorates at Carnegie Mellon, founded the Pittsburgh-based company in 2011. Von Ahn, a Guatemalan immigrant, had already earned some fanfare for his work in the early 2000s helping to develop Captchas, the tests on online forms to ensure people aren’t robots. He founded a company called reCaptcha building on that work that digitized books and archives, which Google bought for an undisclosed sum in 2009.

Von Ahn, 45, still serves as Duolingo’s chairman and CEO, with 39-year-old Hacker as its chief technology officer, and this year’s stock performance has lifted the value of both of their personal stakes in the company to around $800 million each.

Duolingo had 83 million monthly active users and 5.8 million paying subscribers as of the end of the third quarter, with the subscriber count up 57% from 3.7 million last year. Subscribers to Super Duolingo pay $6.99 per month to get an ad-free experience and other features, and the company also rolled out a higher $14/month tier called Duolingo Max in March 2023 that uses OpenAI’s GPT-4 to incorporate generative AI into its lessons, offering conversational role-play and better feedback on mistakes.

“Luis has always wanted to make Duolingo as effective as a human tutor on your phone,” says chief financial officer Matt Skaruppa. “The generative AI tools really give us a path to getting there, so that’s why we’re so excited about it.”

Duolingo’s growth helped it land at 18th on this year’s list of America’s Most Successful Mid-Cap Companies, which screens more than 3,000 companies with a market value between $2 billion and $10 billion using data from Factset to rank the top 100. The ranking is based on earnings growth, sales growth, return on equity and total stock return over the last five years, with more weight given to the last 12 months of data.

The top-ranked stock is Canonsburg, Pennsylvania-based coal producer Consol Energy (CEIX), which has generated $2.8 billion in revenue and $692 million in net income in the last 12 months. Although coal prices have come down since the end of last year in the wake of higher demand following Russia’s invasion of Ukraine, Consol’s stock is up another 50% this year after tripling in 2022.

Most other mid-caps had a sluggish start to the year to lag behind the large-cap S&P 500, with the S&P MidCap 400 down 2.6% through October, but the last six weeks since the beginning of November have produced a 17% rebound. Investors’ optimism that the economy will enjoy a “soft landing” and avoid a recession has lifted every corner of the market, so the mid-cap index’s 14% year-to-date gain still trails the S&P 500’s 23% return.

“While mid-caps have had an okay year, I do think there’s catch-up to be had. Valuation levels right now are near 20-year lows in terms of P/E versus the S&P 500,” says George Smith, co-portfolio manager of the $764 million Davenport Equity Opportunities Fund, a mid-cap fund which is up 22% this year. “Our hope is the sun might shine in some other places than just mega-cap tech behemoths in the so-called ‘magnificent seven.’”

Five outliers on the list including Duolingo have at least tripled this year. The best stock performer is cancer drug developer Immunogen (IMGN), which Abbvie agreed to acquire for $10 billion on November 30 to lift its year-to-date return near 500% following encouraging late-stage trial results announced in May for ovarian cancer drug Elahere.

Another standout is Jacksonville, Florida-based home-builder Dream Finders Homes (DFH), which is ranked fourth on the list. Billionaire CEO Patrick Zalupski, who owns about two-thirds of the company, founded it in the midst of the housing crisis in 2008, and it broke ground on its first home in Jacksonville on January 1, 2009. It’s been profitable every year of its existence, and its concentration in states like Florida, North Carolina and Texas where populations are growing has accelerated its rise.

Dream Finders limits its downside by optioning land instead of owning it, says BTIG analyst Carl Reichardt, and only brings the land onto its balance sheet when it needs it to build a house. “That means that their returns on equity are quite high because they don’t carry as much in the way of assets,” says Reichardt.

Dream Finders’ $3.7 billion in revenue in the last 12 months has quadrupled since 2019, and its stock’s 265% return this year has outperformed large-cap homebuilders like Lennar and DR Horton, which are both still up about 70%.

“There’s very little for sale in the existing housing market,” Reichardt says of the industry as a whole. “That’s given new homebuilders a real opportunity to take market share of the overall transaction market.”

Dream Finders tends to be more volatile than its large-cap peers, particularly with relatively low float since Zalupski owns most of its shares, but investors assuming more risk in smaller stocks also have an opportunity at higher rewards. Some of the other stocks on the midcap list are recognizable names like Crocs (CROX) at No. 20, restaurant chain Texas Roadhouse (TXRH) at No. 57 or No. 75 Abercrombie & Fitch (ANF), which is enjoying a renaissance this year to surge past its mid-2000s record highs. Most of the others will be unfamiliar to all but the most astute investors, but some could be lottery tickets representing the next generation’s stock market leaders.

“Nvidia used to be a small company,” says Bill Hench, portfolio manager of First Eagle Investments’ Small and Smid Cap Opportunity Funds. “They were competing against giants like Intel and others, and they seem to have done okay.”

Click here to see the rest of the list of America’s Most Successful Mid-Cap Companies.