While the Chinese technology market digests a new regulatory landscape impacting the country’s edtech market in a sharply negative manner, U.S. education technology companies have something to cheer about: Duolingo’s IPO priced very well.
The language-learning unicorn initially targeted an $85 to $95 per share IPO price range. That interval was later raised to $95 to $100 per share. And then, last night, Duolingo priced at $102 per share, just over its raised range.
That’s the sort of IPO pricing run that we tend to see from hot enterprise software companies (SaaS) that investors have favored heavily in recent quarters. But the stock market has also provided nigh-indulgent valuations to consumer-facing tech companies with strong brands, like Airbnb. So, the Duolingo IPO’s pricing strength should not be an utter surprise.
But it is a welcome result for U.S. edtech, regardless. When the company set its first IPO price range, TechCrunch noted that it was on track to earn a new, higher valuation. This led us to the following set of conclusions:
If Duolingo poses a strong debut, consumer edtech startups will be able to add a golden data point to their pitch decks. A strong Duolingo listing could also signal that mission-driven startups can have impressive turns.
And now Duolingo has managed to price above its raised range. Yeehaw, as they say.
In more prosaic terms, Duolingo has set a higher multiple for edtech revenue than we expected it to, implying that the exit value of edtech top line could be greater than private-market investors anticipated. After all, Duolingo was valued at around $2.4 billion last November. At its IPO price, the company’s nondiluted valuation is now $3.66 billion, not counting 765,916 shares that its underwriters may purchase at the $102-per-share price if they so choose.
That’s a 50% markup in a half year, more or less. Sure, it’s not a Tiger-level valuation change, but it’s still impressive for a company that was priced toward the end of 2020 after COVID-19 shook up the global education market, funneling new users to edtech startups around the world. That upside should have been priced in back in November. Investors, instead, got a steal.
Duolingo expects Q2 2021 revenues of $57.9 million at the midpoint of its estimates. That gives the company a run-rate multiple of nearly 16x. For reference, the median multiple for public SaaS companies is around 14x at the moment, per Bessemer. So Duolingo, a consumer edtech company, is now more valuable per revenue dollar than the median public enterprise SaaS business.
Perhaps we should have anticipated that, but it still feels surprising given what venture capitalists have historically told TechCrunch concerning consumer software (higher churn than enterprise-focused SaaS, and thus less valuable) and edtech (hard market that has fewer positive outcomes than other software sectors, and thus less valuable). Duolingo is both.
This leads to a few conclusions:
- Edtech is fine in the wake of China’s domestic crackdown; there’s little to no spillover effect onto edtech companies that are not overly tied to the now-changed Chinese market.
- Edtech valuations can be as good as midtier SaaS, if not slightly better. Given how winsome SaaS valuations have become over the last few years, this is great news for the sector as it can easily generate venture-level exits. Duolingo’s PO pricing is a testament to the fact.
Edtech investors should be heartened by the news. Not that they have had a great few weeks in general, but here’s some positive news. Good luck, founders.