UBS sees Duolingo as a ‘best-in-class brand’; Initiates coverage at Buy

UBS initiated coverage of Duolingo Inc (NASDAQ:) with a Buy rating and set a 12-month price target of $195.00 for the language learning app.

“DUOL has a best-in-class brand within the language learning space which is still early in its online penetration ramp,” wrote UBS analysts in a note.

“DUOL has a path to accelerate engagement and payer penetration trends by leaning into GenAI-driven content creation and drive a 29% subscriber CAGR over the next two years,” they added.

UBS expects a stabilization in subscriber monetization by the end of FY23, driven by the ongoing adoption of Family Plans and increased promotion of the new Max tier.

In a more favorable scenario, UBS estimates that Family Plans (which represented 12% of subscribers as of FY22E after their launch in August ’21) and Max subscriptions could collectively make up around a mid-teens percentage of net subscribers over the next two years.

The primary risks for DUOL are subscription retention and the potential for margin expansion.

DUOL experienced robust growth after the COVID-19 pandemic, which could be attributed to pent-up demand for international travel, it’s noteworthy that subscriber growth remained robust even during the pandemic, suggesting that DUOL’s demand is likely driven by structural factors rather than temporary circumstances related to the pandemic.

UBS projects that revenue will experience a compound annual growth rate (CAGR) of 30% from 2023 to 2025, surpassing the Street’s estimate of 25%. This growth is predominantly propelled by a 33% CAGR in subscription revenue, exceeding the Street’s forecast of 25%.

In a more optimistic scenario, UBS envisions that revenue could potentially achieve a 39% CAGR over the same period. This scenario assumes accelerated subscriber growth and stronger tailwinds in terms of monetization.

Shares of DUOL are up 3.73% in mid-day trading on Thursday.