Duolingo (NAS:DUOL) — mrkt cap $7.65B; Price $180.89; EV/EBITDA 37
PASS. When new technology comes along, it either hurts or helps companies. Determining the direction it will take can often be difficult. That is not the case with Duolingo, one of the most popular language learning apps. In a pre-AI world, DUOL boasted significant content and effectively gamified language learning. However in a post-AI world, DUOL’s moat is drastically reduced- With the advent of technologies like ChatGPT, users can engage in interactive conversations and receive personalized learning programs. Given the numerous companies capable of integrating this technology and enhancing it with various wrappers, we believe Duolingo’s legacy tech stack is now severely outdated. The cost of learning a language will likely fall to the cost of compute. While we do not short companies, Duolingo is a prime example of an incumbent being adversely affected by new technology.
Twilio (NAS:TWLO) — mrkt cap $10.3B; Price $60.56; EV/EBITDA NA
PASS. On-premise IT communication hardware for enterprise is dying and being replaced by the cloud and API economy. Twilio’s communication software presents enterprises the ability to connect with Twilio’s APIs and begin messaging/calling clients through a variety of means. This was a former Cathy Wood darling, but in recent months, she has totally divested her position (TWLO is also down ~90% since highs). Revenue growth is likely the cause, as this was a former hyper-grower (>50%) and now growth has slowed to LSD. Twilio has some of the best-in-class developer tools and will continue to benefit from the death of IT hardware. We assume it is only a matter of time before an activist investor addresses the unusually high SBC given their revenue growth slowdown. Valuation is also still high; we will wait for now.
Q.E.P. Co (Ticker:QEPC) — mrkt cap $94mm; Price $28.7; EV/EBITDA 8.6
PASS. QEPC is a major supplier of tools and accessories for installing flooring and recently appeared on our special dividend screen. They have recently completed the exit of some flooring lines and divested their UK operations – we are decidedly biased towards companies that take steps to renew their commitment to core markets. They are on path to becoming debt-free and with a healthy cash balance by EOY. The company has some strong brands and fits the DIY trend nicely, but its customer base is heavily concentrated, with Home Depot representing ~40% of their sales. We appreciate their shareholder alignment but will need a better entry valuation before revisiting.