Duolingo, Inc. (DUOL): Are hedge funds bullish on this growth stock right now?

We recently made a list Ray Dalio’s Top 10 Growth Stocks With Revenue Growth of Over 30%. In this article, we take a look at how Duolingo, Inc. (NASDAQ:DUOL) is performing against its peers, with revenue growing by over 30%.

Stock valuation comes in many shapes and forms. The most common is the price-to-earnings ratio. This ratio is not only used to assess the premium that investors are paying for a company right now, but is also used in conjunction with projected earnings to place bets on the future price of the stock. This allows investors to position their portfolio relative to the market and invest in stocks that they believe will rise in the future.

However, stock earnings aren’t the only income statement line item used in stock valuation. Two other popular approaches are the price-to-sales or P/S ratio and the enterprise value-to-revenue or EV/revenue ratio. Both of these take into account a company’s top-line performance, and the latter is typically used to value companies that are in high-growth sectors that are ripe for takeovers.

Of the two, the P/S ratio was popularized by billionaire Ken Fisher. One of the richest men in the world, Fisher has a net worth of $11.2 billion. He shared his approach to using earnings growth in a 1984 article for the American Association of Individual Investors (AAII). Fisher said that the P/S ratio could help investors “gauge indicators of stock popularity.” He said this was crucial because it allowed them to filter out stocks with low P/S ratios, as they were most likely to gain value in the future if something positive happened. Fisher added that while the P/E ratio was also a measure of popularity, it was too “flexible” and dependent on various accounting assumptions used to arrive at net income.

On the other hand, the AP/S ratio removed the effects of these “accounting assumptions,” Fisher shared. To back up his claims, he pointed out that stocks in the bottom quartile (25%) of P/S ratios returned 64.57% and 56.11% for the bottom seven and nine stocks, respectively, which significantly outpaced the 28.67% return for the bottom nine P/E stocks.

However, this article is about Ray Dalio, not Ken Fisher. Like Fisher, Dalio is also one of the richest people in the world. Forbes magazine estimates his net worth as of July 2024 at $15.4 billion. Dalio’s hedge fund, Bridgewater Associates, listed $19.7 billion in investment positions in its first-quarter 2024 SEC filings. These investments are consistent with his approach of taking a broader look at the global economy and geopolitical environment and looking at which stocks could benefit.

Speaking of returns, the last few years have been tough for Dalio. While he’s neither Bridgewater’s CEO nor CIO these days, his philosophy is responsible for creating much of Bridgewater’s most iconic products, like the Pure Alpha fund. Bridgewater’s Pure Alpha has struggled over the past four years, down 4% over that span, in an environment where global bonds and the economy have struggled with high inflation and interest rates.

At the same time, even though Bridgewater has struggled through recent economic crises, it has managed to hold its own during several downturns in the past. For example, in 2008, the firm returned 8.7% during a time when the S&P 500 fell 38.5%. It’s times like these that show the true strength of a hedge fund boss, and in 2018, Bridgewater returned 14.6%, which was a stark contrast to the hedge fund industry average loss of 6.7%. As for the Pure Alpha 11 fund, it returned 11.4% between 1991 and 2022. Finally, 2024 looks like a breath of fresh air for Dalio’s firm as well, as it posted a strong 16% return in the first quarter, which was 11 percentage points higher than the hedge fund industry average of 4.59%.

Returning to earnings growth, while Fisher’s central point in favoring P/S over P/E is the unwarranted impact of accounting on earnings and, therefore, stock prices, is it possible that earnings surprises also drive stock prices? If so, the advantage of using P/S, and especially lower P/S stocks as investments, increases and becomes more important. In this regard, research from Emory University and Stern Business School analyzed income statement, balance sheet, and return data from 1987 to 2003 to see if there was a relationship between earnings surprises and stock returns related to earnings announcements.

It revealed that “earnings surprises accompanied by revenue surprises signal more sustained earnings growth than similar levels of earnings surprises that are not accompanied by matching revenue surprises.” In numerical terms, the study found that revenue surprises provide another valuable signal to investors, as when stocks were screened for both revenue and earnings surprises, the difference between the abnormal returns in this category was 8.41%, which was almost two percentage points higher than the difference for stocks screened for earnings surprises alone.

Since revenue seems to be an equally important part of stock valuation, we decided to take a look at the best Ray Dalio stocks for revenue growth.

Our methodology

To create our list of Ray Dalio’s Top Growth Stocks with 30%+ Revenue Growth, we first filtered Bridgewater Associates’ top 230 holdings by investment value to select only those stocks with absolute revenue growth greater than 80% over the past three years. These stocks were then further filtered by their 1-year revenue growth and selected those with growth greater than 30%. These stocks are ranked by the value of the company’s stake in them in Q1 2024.

We also mentioned the number of hedge funds that bought these stocks during the same accounting period. Why are we interested in stocks that hedge funds invest in? The reason is simple: Our research has shown that we can outperform the market by mimicking the top stock picks of top hedge funds. Our quarterly newsletter strategy selects 14 small- and large-cap stocks each quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Duolingo, Inc. (NASDAQ:DUOL)

Number of hedge fund investors in Q1 2024: 43

Revenue growth in 1 year: 44%

Bridgewater Associates Q1 2024 Shares: $12.7M

Duolingo, Inc. (NASDAQ:DUOL) is a technology company that provides a fully online language learning platform and service. It’s a pioneer in its industry, which has given it a lot of brand recognition, which has flourished during the pandemic, making Duolingo, Inc. (NASDAQ:DUOL) quite popular with college and job candidates looking to prove their language skills. Its popularity and market share mean that Duolingo, Inc. (NASDAQ:DUOL) has to focus on innovation and product delivery to stay on top of its industry and ensure that aspiring participants don’t take its share away. On that front, its platform now covers over 40 languages, and Duolingo, Inc. (NASDAQ:DUOL) could also expand its competitive edge by targeting non-core sectors like physics and math. Additionally, Duolingo, Inc. (NASDAQ:DUOL) has 88.4 million users, a fraction of the world’s population and internet users, giving it a lot of room to grow. At the same time, any weakening in daily average user (DAU) growth will weigh on the stock price and force Duolingo, Inc. (NASDAQ:DUOL) to aggressively expand its platform.

Here’s what Duolingo, Inc. (NASDAQ:DUOL) management had to say about usage metrics during its Q1 2024 earnings conference call:

“In Q1, we grew revenue and bookings by 45% and 41%, respectively, achieved record profitability, and increased active users (DAU) by 54% year over year. These results demonstrate the power of our product-driven flywheel. Our superior product drives word-of-mouth growth, which in turn drives data to continually improve the product, ultimately increasing subscriber engagement and conversion. Our three-pronged approach to better teach, grow users, and convert them into subscribers continues to be a winning strategy for us. This year, our monetization efforts are focused on optimizing our subscription offerings, including our Family Plan and our third tier of Duolingo Max.

We are pleased with the progress we have made on Max based on the results of our experiments to date. That is why we rolled out Max more broadly in April, and now around 5% to 10% of our DAUs have access to it. We will roll it out to more countries and courses over the next few months. We are also improving our Family Plan experience by streamlining the invite flow and offering more engaging social features. The progress on these initiatives, in addition to our other monetization initiatives and our current trends, gives us the confidence to raise our full-year guidance.”

Total DUOL takes 9th place on our list of stocks with 30+% revenue growth. You can visit Ray Dalio’s Top 10 Growth Stocks With Revenue Growth of Over 30% to see other growth stocks that are on the hedge fund radar. While we recognize DUOL’s potential as an investment, our belief is based on the belief that some AI stocks are more promising in terms of delivering higher returns and doing so in a shorter time frame. If you’re looking for an AI stock that is more promising than DUOL but is trading at less than 5 times its earnings, check out our report on cheapest AI action.

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Disclosure: None. This article was originally published on Insider Monkey.