Breakingviews

NEW YORK (Reuters Breakingviews) – Learning how to speak fluent Klingon is a stretch. So is Duolingo’s valuation. The language tuition app has inked a $2.4 billion valuation in its most recent fundraising, a 60% jump from last year. That calls for some tongue-twisting financial assumptions.

The online learning tool that teaches some 40 different languages – including the mother tongue of Star Trek’s fictional humanoid species – has grown at a rapid clip since its 2011 founding. The Pittsburgh-based company has more than doubled revenue in each of the last three years, and in 2020 it is likely to garner bookings, a number similar to revenue, of $200 million. As lockdowns continue and people search for ways to spend long winter months, clicking through language studies might become appealing.

The trouble is Duolingo gives its educational material out for free while charging for ancillary perks, like ad-free usage or offline content. As a result, about 80% of its revenue comes from just 4% of its users. The company’s Chief Executive Luis von Ahn wants to change that. He told the Wall Street Journal that he hopes to mimic the trajectory of Spotify Technology, which has successfully monetized subscribers.

It’s a worthy goal but an improbable one. A study from Nielsen Music showed that 90% of the U.S. population listened to music. On average, they plug in for more than 32 hours a week. Learning a language is more of a luxury. Perhaps Covid-19 has afforded people time, but that doesn’t mean they’re as willing to spend money on Duolingo’s product.

Even if Duolingo became Spotify-like, $2.4 billion is a reach. Assuming the company’s bookings figure is reflective of revenue at the end of the year, its fundraising values it at 11 times that figure, twice Spotify’s enterprise value-to-sales multiple. In any language, that sounds a lot like overvaluation.