- Luckin Coffee is in recovery mode and could reward investors.
- Duolingo is an industry leader in digital language learning.
Want to beat the market? Look no further than growth stocks. These companies have a track record of increasing revenue and earnings faster than average — making them an excellent way to supercharge your stock portfolio. Let’s explore why Luckin Coffee (OTC: LKNCY) and Duolingo (NASDAQ:DUOL) fit into this category and could make rewarding investments in October.
1. Luckin Coffee
With its shares up 50% since the start of the year, Luckin Coffee appears to be in recovery mode as investors begin to regain confidence. The controversial Chinese coffee chain has been reeling from the effects of its 2019 accounting scandal. But now, with surging sales and a reasonable valuation, the stock deserves attention again.
Image source: Getty Images.
In September, Luckin Coffee submitted its 2020 annual report to the SEC. The filing was delayed because of the company’s ongoing efforts to restructure and assess the damage from its previous management, which falsified up to $310 million in fiscal 2019 sales. Granted, the report is behind by around 10 months, but this is a key milestone in Luckin’s efforts to normalize, and the operational data is encouraging.
Net revenue jumped 33% to $618 million with the contribution from partnership stores (Luckin’s version of franchisees) surging by almost 2,000% to $49 million in the period. Luckin’s new franchise business model (which it started in 2019) could also shift some operational costs and risks to the franchise holders, helping to stabilize the business. As of July 31, the company had 1,293 partnership stores and 4,030 company-operated stores.
With a market cap of $3.7 billion, Luckin Coffee trades for just under six times its 2020 revenue, which is modest for a fast-growing company. Some discount is justified because of its ongoing restructuring and delayed 2021 filings, but Luckin is on track to emerge from its crisis stronger than ever, and early investors could be handsomely rewarded.
Going public at $102 per share in July, soaring to $205 in September, and now back to $145, Duolingo has been on something of a rollercoaster ride since its debut. While the language learning platform sports a premium valuation, it is also addressing a massive potential market and has developed a convincing business strategy.
Analysts at Brandessense expect the global language-learning market to expand at a compound annual growth rate of 18.7% to $173 billion by 2027 because of increasing digital globalization and improving technology. Duolingo is positioned to capture some of this opportunity because its free language-learning app is more convenient than a classroom or tutor. It’s also effective — with management claiming the platform can help learners reach four semesters’ worth of language proficiency in half the time it takes for U.S. university students.
Duolingo’s business is clearly growing. Second-quarter revenue was up 47% year-over-year to $58.8 million. Monthly active users did dip 3% to 37.9 million, but that was due to a difficult comparison to pandemic-affected 2020 when many people stayed home. According to CEO Luis von Ahn, Duolingo has already resumed its “normal” MAU growth rate of roughly 20% since 2016.
For the full year, management expects revenue of as much as $242 million — giving the stock a price-to-sales multiple of 28. That isn’t cheap. But Duolingo has established itself as a clear front-runner in the digital language-learning industry. And it seems to be at the beginning stages of monetizing its user base (96% of whom are not paid subscribers) and the potentially valuable data they generate.
Betting on growth
Luckin Coffee and Duolingo both report impressive top-line growth rates and the potential for big profits over the long term. But they are suited to slightly different investment strategies. Luckin Coffee boasts a lower valuation, but faces more uncertainty because of its restructuring. On the other hand, Duolingo is a much pricier stock with less legal overhang. Both are worth a closer look, depending on an investor’s objectives and risk tolerance.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
Will Ebiefung owns shares of Luckin Coffee Inc. The Motley Fool owns shares of and recommends Luckin Coffee Inc. The Motley Fool has a disclosure policy.