Shares of Duolingo Inc (DUOL) took a hit in early trading on Monday despite the company’s impressive growth trajectory. The stock has enjoyed a remarkable 78% surge since its second-quarter earnings report, but analyst Andrew Boone of JMP Securities believes this rally has pushed the stock’s valuation to a level where the risk-reward proposition is no longer favorable.
Boone downgraded Duolingo’s rating from Market Outperform to Market Perform, citing the stock’s current valuation as already reflecting the company’s future growth plans. He maintains a positive outlook on Duolingo’s operational execution and its product roadmap, particularly emphasizing the potential of new features like video calls.
Boone highlights how video calls offer learners a richer experience and can boost user conversion. Furthermore, he points to Duolingo’s ongoing investments in AI-powered conversational learning, which promises to revolutionize the language learning experience. The company’s ability to sustain growth, coupled with its consistent product improvements, has already earned it a place among market leaders. The analyst emphasizes the early stage of Duolingo’s advancements in AI and catering to ‘advanced learners,’ suggesting further growth potential.
However, Boone acknowledges that the stock’s current valuation already accounts for these promising developments. In the past, a significant portion of Duolingo’s user growth stemmed from new users. However, the company is now increasingly reliant on re-engaging existing users, especially in markets with high monetization potential.
As of Monday’s trading session, Duolingo shares declined by 0.6%, settling at $288.02. This downward movement reflects the market’s cautious response to the analyst’s downgrade, which has sparked a debate about whether Duolingo’s impressive growth narrative can sustain its current valuation.
Despite the recent downgrade, Duolingo remains a prominent player in the language learning space, boasting a loyal user base and a commitment to innovation. The company’s dedication to creating engaging and effective learning experiences is a testament to its strong foundation for future growth, even as the market wrestles with the delicate balance between valuation and growth prospects.