Duolingo stock has fallen sharply from its highs, but one analyst thinks investors may be underestimating the growth prospects of the language-learning company.
Evercore ISI analyst Mark Mahaney upgraded Duolingo shares to Outperform from In Line on Monday and doubled his price target to $210 from $105. The new target implies more than 40% upside from the stock's Monday close of $148.36.
Mahaney compares Duoliongo's setup to Netflix in 2022, when slowing growth sent the streaming company's stock tumbling before new products helped revive its business. But he acknowledges that Duolingo isn't as cheap as Netflix was then and lacks Netflix's scale.
Duolingo's latest results showed that users are still flocking to the app. Second-quarter revenue rose 18% from a year earlier, while total bookings increased 8%. Daily active users climbed 23% to 58.7 million, while paid subscribers rose 17% to 12.7 million.
Evercore now expects Duolingo to reach about 99 million daily users in 2028, compared with Wall Street's estimate of 85 million. Its 2028 earnings estimate of $5.10 a share is also 24% above street consensus.
Duolingo has been adding features designed to keep users coming back. Speaking practice has become more widely available, while its artificial-intelligence-powered Video Call feature was added to the cheaper Super subscription after the cost of providing such calls were cut dramatically.
But profits are under pressure for now. In the second quarter, Duolingo's net income fell 26%. Management said the decline was expected as it deliberately invests more to attract and retain users, noting that profitability had actually come in better than the company had anticipated.
The analyst is betting that Duolingo's fast user growth will eventually translate into stronger revenue and earnings than Wall Street currently expects.
According to Evercore's latest survey of 1,300 U.S. language learners, some 53% of online respondents use Duolingo, about four times the share of rival Babbel. Meanwhile, 66% of Duolingo users said they were very or extremely satisfied, up from 64% last year.
People using artificial intelligence to learn languages remains a competitive risk, but Evercore's survey found little evidence that it is hurting engagement among existing Duolingo users: ChatGPT was used by 36% of language learners, yet more than half of those people also use Duolingo, and 63% of the overlap group uses Duolingo daily, roughly matching the app's overall users.
"AI overlap isn't cannibalizing the habit," Mahaney wrote, noting that the main AI risk for Duolingo is it could make it harder to attract new casual users rather than existing Duolingo users abandoning the app.
To be sure, there are some warning signs. Evercore's survey found that 33% of Duolingo users said they were very likely to stop using the app within three months, up from 30% last year and 23% in 2024.
Duolingo shares dropped 9.4% the day after its latest earnings report on Aug. 5.
The company forecast third-quarter revenue to come in at $302 million, slightly below the roughly $304 million Wall Street had expected.
The stock has since recovered 21% to $148.36 as of Monday's close. Still, shares remain 15% lower this year and nearly 58% below their 52-week high of $353 reached last October.