On Monday, JPMorgan initiated coverage on Duolingo Inc. (NASDAQ:DUOL), the popular language-learning platform, with an Overweight rating and a price target of $270. The firm highlighted Duolingo's strong market position, with 88.4 million monthly active users (MAUs) and 26.9 million daily active users (DAUs), which represent about 5% of the estimated 1.8 billion global language learners. This relatively low penetration rate suggests room for significant growth.
The analyst from JPMorgan underscored Duolingo's freemium model as a key advantage, facilitating a natural conversion funnel for its 6.6 million paid subscribers. The company's strategic focus on product innovation, a social-first marketing approach, and gamification have contributed to its industry-leading scale and brand reputation.
Notably, approximately 90% of Duolingo's user growth is organic, indicating a highly efficient user acquisition strategy.
JPMorgan projects Duolingo to maintain a sustainable growth trajectory, with expectations of over 20% annual growth in Bookings and Revenue between 2023 and 2026. The forecasts include a compound annual growth rate (CAGR) of 24% for Bookings and 27% for Revenue. The firm anticipates the company to make significant progress toward its long-term adjusted EBITDA margin target of 30-35%, up from 17.6% in 2023.
The bullish stance is based on several factors, including anticipated strong user growth, deeper monetization and paid subscriber growth, improved teaching efficacy to unlock the total addressable market, and the application of generative AI (GenAI) in enhancing products and features while reducing costs. JPMorgan also expects Duolingo to achieve positive operating income and significant net income growth in 2024.
The price target of $270 is based on approximately 19 times JPMorgan's estimated 2025 Gross Profit of $674 million, which corresponds to roughly 41 times the projected 2026 adjusted EBITDA and 37 times the 2026 free cash flow (FCF). According to JPMorgan, Duolingo's forecasted revenue and adjusted EBITDA growth are among the highest in their coverage universe.
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