UBS raises Duolingo stock price target to $410, maintains buy

On Monday, UBS analyst Chris Kuntarich increased the price target for Duolingo Inc. (NASDAQ:DUOL) shares to $410 from the previous target of $408, while sustaining a Buy rating on the stock. Currently trading at $328.20, the company has demonstrated impressive financial health, earning a "GREAT" rating according to InvestingPro metrics. The revised price target comes as the analyst anticipates the language-learning platform to set moderate growth expectations for daily active users (DAUs) in the upcoming fourth-quarter earnings report, scheduled for February 26.

Kuntarich expects Duolingo to use the report to adjust its full-year 2025 DAU growth forecast, offer conservative guidance on bookings and adjusted EBITDA margins, and provide additional insights into the adoption of its Max subscription service. The company has already shown strong momentum with a 42.47% revenue growth in the last twelve months, maintaining impressive gross profit margins of 73.13%. UBS now models a 37% year-over-year increase in average DAUs for fiscal year 2025, a deceleration to 34% growth by the fourth quarter of 2025, with a net addition of 13.5 million DAUs over the year.

The analyst also commented on the company's gross margins, suggesting that consensus estimates for fiscal year 2025 reflect only a modest ramp-up in Max adoption, which accounts for a 50 basis point gross margin deleverage compared to UBS's estimate of 170 basis points. Kuntarich believes the sequential declines in margins may be more prolonged due to the early stage of Max's product life cycle.

Despite these considerations, UBS maintains its Buy rating, citing Duolingo's history of conservative guidance. The firm suggests that unless the company's guidance falls below sell-side estimates for fiscal year 2025, more positive data on Max adoption could lead to an upward movement in Duolingo shares. The analyst's comments reflect a belief in the company's potential for growth and the anticipation of further details on its performance and strategy in the near future. For a deeper understanding of Duolingo's financial health and growth prospects, investors can access the comprehensive Pro Research Report available on InvestingPro, which includes 16 additional investment tips and detailed valuation analysis.

In other recent news, Duolingo Inc. has seen significant developments in terms of earnings, revenue, and analyst ratings. The language learning platform reported a remarkable 42.5% revenue growth and a robust 73% gross profit margin. However, Jefferies, starting coverage of Duolingo, assigned a Hold rating to the company's shares, expressing concerns about future growth, particularly its expansion into new user segments.

In contrast, JP Morgan reiterated an Overweight rating on the company's stock, projecting significant increases in paid subscribers for Duolingo's Max product, translating to substantial future revenues. BofA Securities, on the other hand, downgraded Duolingo from "Buy" to "Neutral," citing less upside potential as shares are currently trading at peak valuation, while Needham maintained a Buy rating on the company, citing the new growth phase driven by GenAI-powered features.

Duolingo recently expanded its AI-driven conversation feature, Video Call, to Android users, adding support for five new languages. This is part of the company's strategy to provide advanced learning tools that were traditionally accessible only through travel or personal tutoring. The company also reported a significant increase in daily active users, indicating strong user engagement.

These recent developments highlight Duolingo's robust growth prospects and innovative strategies, including leveraging GenAI technology and expanding its subscription offerings, all aimed at driving user growth and financial performance.

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