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Duolingo Trades At Peak Valuation, Analyst Downgrades It
DUOLDuolingo(DUOL) Benzinga·2024-12-11 19:30

Core Viewpoint - Duolingo Inc's stock was downgraded from Buy to Neutral by B of A Securities analyst Curtis Nagle, with a revised price target of 375,indicatinglessupsidepotentialasthestockistradingatpeakvaluation[1][6].Group1:FinancialPerformanceandProjections−Nagleanticipateslong−termpotentialforDuolingotoachieve40375, indicating less upside potential as the stock is trading at peak valuation [1][6]. Group 1: Financial Performance and Projections - Nagle anticipates long-term potential for Duolingo to achieve 40% EBITDA margins and over 20% GAAP net income margins, compared to current margins of 26% and 13% respectively [2]. - The expected revenue for the fourth quarter is 206 million, with an EPS of 0.46[7].−NagleexpectsrevenuesandEBITDAtoexceedcurrentStreetestimates,butcautionsthatamissonDailyActiveUsers(DAUs)oronlyamodestrevenuebeatcouldnegativelyimpactshares[5].Group2:MarketPositionandGrowthOpportunities−Duolingohasastrongtrackrecordofbeatingestimatesandraisingguidance,whichhascontributedtoanincreaseinvaluationoverthepastseveralyears[4].−Thecompanyhascompellinglong−termgrowthopportunities,includingviralusergrowth,scalinginternationalmarkets,andexpandinghighAverageRevenuePerUser(ARPU)tierslikeDuolingoMax[3].−Marketingexpensesaccountforonly110.46 [7]. - Nagle expects revenues and EBITDA to exceed current Street estimates, but cautions that a miss on Daily Active Users (DAUs) or only a modest revenue beat could negatively impact shares [5]. Group 2: Market Position and Growth Opportunities - Duolingo has a strong track record of beating estimates and raising guidance, which has contributed to an increase in valuation over the past several years [4]. - The company has compelling long-term growth opportunities, including viral user growth, scaling international markets, and expanding high Average Revenue Per User (ARPU) tiers like Duolingo Max [3]. - Marketing expenses account for only 11% of sales, compared to 15% for sub-peers, indicating a more efficient growth strategy [3]. Group 3: Valuation and Market Reaction - The price target of 375 is based on 14 times 2026 EV/Sales, which is a premium compared to high-growth subscription service peers trading at 9 times [6]. - DUOL stock experienced a decline of 7.36%, trading at $335.18 following the downgrade [8]. - The magnitude of earnings beats has narrowed in recent quarters, setting a stricter bar for the upcoming fourth-quarter earnings report [4].