The Duolingo language-learning app and the e.l.f Beauty cosmetics site have both used TikTok to drive their growth. What happens now? By Angela Palumbo and Emily Dattilo
Teaching Spanish and peddling mascara have little in common. Yet the Duolingo language-learning app and the e.l.f Beauty cosmetics site have both found great success using TikTok to drive their growth. That could be threatened now that the U.S. has banned the social-media platform because of its Chinese ownership.
TikTok, the short-form video platform owned by Chinese company ByteDance, launched in 2016 and exploded in popularity during the pandemic. According to Statista, TikTok was downloaded globally around 984 million times in 2020 up from 703 million times in 2019.
Social media peers launched competing offerings, including Meta Platforms' Reels and YouTube's Shorts, but no one has been able to replicate TikTok's success. And the platform has become a core part of the sales strategies for e.l.f Beauty's makeup and Duolingo's language app. Those stocks have been two of the stock market's best performers, gaining more than 350% since 2022.
Depending on TikTok has risks. The nature of social media means companies must cede power to fickle users who can suddenly turn on a company, or to governments that can invoke new regulations and rules.
The latest attack on the regulation front came a couple of weekends ago when the House of Representatives passed a measure that would force ByteDance to sell TikTok within a year or stop operating it in the U.S. The proposal, which was paired with an aid package for Ukraine and Israel, lengthened the sale period from a six-month window in an earlier bill. It passed the Senate and was signed by President Joe Biden.
"If eventually ByteDance goes down the forced sale route, we see no chance TikTok would be sold WITH the algorithm as Beijing and ByteDance would never allow that to happen in our view," Wedbush analysts wrote on April 22. "The value of TikTok would dramatically change without the algorithms and makes the ultimate sale/divestiture of TikTok a very complex endeavor with many potential strategic/financial bidders waiting anxiously for this process to kick off."
For companies who built their marketing strategies around TikTok, a ban of the app, or a change to the way it operates, could upend a sales strategy that helped propel their stocks higher.
Duolingo is a language-learning app that was founded in 2011 and went public in 2021. Take a scroll through its social media pages, though, and it's clear the posts play more on Duolingo's green owl mascot's whimsical sense of humor and less on verb conjugation or vocabulary.
That wasn't always the case. When the company first started using social media, it was focused on trying to market the product, convincing potential customers to sign up because they wanted to learn a language. "It was actually a big failure," said Duolingo Chief Marketing Officer Manu Orssaud.
The company, though, realized that Duo the Owl, Duolingo's mascot, could hop on to trends and create entertaining content. Its quirky tone has been at the heart of the Duolingo app through fun push notifications and building "streaks" for each day a lesson is completed -- all with the owl mascot center stage. Duolingo currently has 11.7 million followers on TikTok, up from only 2.1 million at the end of 2021, according to Social Blade. That has translated into Duolingo's financials. In the most recent quarter, ended Dec. 31, daily active users totaled 26.9 million, rising 65% from a year ago, while paid subscribers totaled 6.6 million, jumping 57% from the year prior, something the company attributes largely to social media. The stock gained 116% from its offer price when it began trading in 2021 through the end of March.
"They focused on making a really strong product that was engaging, really fun to use, and that you're learning something as well," said Needham analyst Ryan MacDonald.
Dulingo wasn't the only company that realized the benefits of mastering TikTok. E.l.f., a cosmetics company known for selling $1 makeup brushes, was once a $10 stock. Shares are now trading around $160. E.l.f. made some crucial business decisions that have helped increase their revenue and market share. This included closing bricks-and-mortar locations in 2019, shifting instead to a more digital focus. E.l.f. also got in early on using TikTok as a marketing tool.
"They've more than tripled on a rate basis the amount of money they're spending on marketing, and they're spending it well on innovative social platforms where their consumers spend time -- TikTok being one of them," William Blair analyst Jon Andersen, who rates the stock as Outperform, said in an interview.
Most of the notoriety e.l.f. has gained online is from independent users choosing to post videos reviewing the products and recommending what they think is worth buying.
Chief Financial Officer Mandy Fields tells Barron's that a majority of brand awareness has come from testimonials from independent users. It's helped reach customers like Caitlin Dennie, 25, a medical assistant from Staten Island, N.Y., who started using TikTok when the pandemic hit.
She has since made several purchases after being influenced by people advertising products on the app, including the e.l.f. Hydrating Camo Concealer.
"I'm a very indecisive person. I'm always asking people for their opinions, like 'What's a good face wash? What's this, what's that?'" Dennie said. "If they're saying it's good and they're showing me how good it is, I have to try it."
The spending has paid off. E.l.f. made its public debut in 2016 at $17 a share. Revenue has climbed 152% to $578.8 million in 2023 from 2016, and its stock has jumped 875% from its IPO price.
Even larger brands have used TikTok to attract customers to products they might not have thought of otherwise. Amazon.com, for instance, has established itself as the one-stop shop for nearly anything. And while the platform sells a whole slew of popular name-brand products, it also has a list of off-brand versions of products that social-media users have deemed "dupes."
At a recent count, there were about 221.7 million TikTok videos sporting the hashtag "amazondupefinds." This content, which tends to center around apparel and accessories, is created and shared by users who might tout, for example, knockoffs of $100 Lululemon leggings that can be purchased for around $20. In an inflationary environment where younger shoppers are looking for products both trendy and wallet-friendly, a "dupe" checks both boxes.
According to LTK's study of Gen Z shoppers published in April 2023, three-quarters of the demographic said they make purchases online from creator recommendations.
It isn't always sunny skies for TikTok, however. "Cancel culture," the term used to describe when a large group of people on an internet forum take action against a person or company they deem has done something wrong, can result in a boycott of a company's products and services. Starbucks, for instance, has been hit by a TikTok boycott over comments the company made regarding the continuing conflict in the Middle East. It's an issue that requires companies carefully calibrate their messaging with the community that has built up around its products.
A bigger issue might be the future of TikTok itself, in view of the proposal for a sale or a ban.
Analysts and companies argue that, in the event of big changes to the platform, users would move on to the next best thing, whether it be Instagram Reels or YouTube Shorts.
Fields, E.l.f.'s CFO, assures that the company will be OK. She told Barron's that she believes "there's a forum where our community will go, and we'll be there ready for them."
Duolingo's Orssaud struck a similar chord. "People want to be entertained," he said. "And if they leave TikTok to go to other platforms, we'll be there and our content and our strategy will remain the same."
However, when taking a look at these companies' Securities and Exchange Commission filings, risks to their businesses from having a social-media presence are clear. In e.l.f. Beauty's most recent 10-K from March 2023, the company said that any disruptions to social media channels "that we have come to depend on for marketing could materially adversely affect our business." Duolingo made similar comments in its latest 10-K, noting that outside forces controlling social-media restrictions can have negative impacts.
Jackson Gilmore, the founder of Oplae, a company that builds tools for social media creators, said social platforms have become contact lists for businesses and that they made finding audiences simple. There's more to it than that, though.
"At the end of the day, who owns these contacts?" Gilmore said. "It's not these businesses -- it's the platforms. With the upcoming ban on TikTok, there's no recourse to recover that contact list."
These companies can surely try shifting their strategies. It will ultimately be up to the social-media consumer, however, to decide whether or not that works for them.
Write to Angela Palumbo at angela.palumbo@dowjones.com and Emily Dattilo at emily.dattilo@dowjones.com
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(END) Dow Jones Newswires
April 26, 2024 21:30 ET (01:30 GMT)
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