Duolingo 10-Cap Valuation with Owner's Earnings

Duolingo has a lot of one-time charges, so I want to calculate Owners Earnings

Quick refresher on Owner's Earnings...

Owner earnings are the actual cash a business generates that is available to its owners, calculated by taking net income and adding back non-cash expenses like depreciation, then subtracting the capital expenditures needed to maintain the business.

It's a metric that Buffett developed, and you can get his full description of OE in the 1986 Berkshire Letter.

He gives and example... it's sort of hard to understand, but if you spend time and sit with it, you'll have your "aha!" moment. Reach out to me directly if you've read the letter and are still confused. Owner's earnings are powerful.

/rant

Duolingo's Owners Earnings

Buffett uses Net Income + Depreciation + Amoritization + Other non-cash charges - maintenance capex.

When Buffett developed Owner's Earnings in 1986, the Cash Flow Statement wasn't a mandatory document yet (!!)

An easier way to determine OE is: Operating Cash Flow - Maintenance CAPEX.

In a software business like Duolingo, P&E is mostly office build-outs and equipment, not the core “engine” of the product. A good chunk of 2024 P&E was clearly growth (new offices in NYC’s 4 WTC and Seattle), but the conservative, mechanical way to get a maintenance number is approximately equal to P&E, which is 2024 was $12M.

Thus, the Owner Earnings are: $285M - $12.1M = $273M

Let's 10-cap it!

So, the most we'd be willing to pay for a 5% return is $5.4B, a 10% return is $2.7B, and a 20% return would be $1.3B.

Current market cap is $7.75B. With that, we should expect a 3.52%.

Our 10-cap does not look good for Duolingo. But! Remember, the biggest limitation of 10-cap valuation is that it does not account for growth! This is a growth company.

Sentiment: Neutral