On Wednesday, BofA Securities adjusted its stance on Duolingo Inc. (NASDAQ:DUOL), downgrading the language learning platform from "Buy" to "Neutral," while simultaneously increasing the price target to $375 from the previous $355.
"We downgrade Duolingo (DUOL) to Neutral given less upside potential as shares are now trading at peak valuation and NT estimate revisions may be lower than in prior quarters," the firm said.
In the assessment, BofA Securities acknowledges Duolingo's high-quality status and consistent growth trajectory within the internet sector. The firm recognizes the company's long-term potential, citing prospects of achieving 40% EBITDA margins, a significant increase from the current 26%, and over 20% GAAP net income margins, up from 13%.
Duolingo's strategies have been highlighted as key drivers for growth. Its ability to attract users virally, with marketing expenses constituting only 11% of sales compared to 15% for its sub-peers, and the notable increase in subscriber numbers relative to total users, are particularly commendable. Moreover, Duolingo's efforts to scale international markets and expand high Average Revenue Per User (ARPU) tiers, such as Duolingo Max, are seen as promising long-term growth opportunities.
However, the current market valuation of Duolingo's shares, trading at 14/46 times the projected 2026 Enterprise Value/Sales (EV/Sales) and EV/EBITDA, suggests that the potential growth may already be reflected in the stock price. As a result, despite the positive long-term outlook, BofA Securities has tempered its rating.
The revised price objective of $375 is based on a 14 times multiple of the projected 2026 EV/Sales, which represents a slight increase from the previous target set at a 13 times multiple. This adjustment is attributed to the overall higher sector valuation.
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