Duolingo Upgraded to Outperform by Evercore on Accelerating User Growth

Evercore ISI upgraded language-learning app Duolingo (NASDAQ: DUOL) to Outperform from In Line, arguing that accelerating user growth and recent product improvements position the company for a stronger earnings trajectory than currently anticipated by the market. The brokerage more than doubled its price target on the stock to $210, implying more than 40% upside from the shares' Aug. 31 closing price of $146.98.

The Bullish Thesis

Evercore's upgrade is backed by proprietary survey data, product analysis, and third-party metrics. The firm highlighted several key factors supporting its positive outlook:

• Market Dominance: A survey of 1,300 U.S. language learners showed Duolingo with a 53% share, far ahead of its closest pure-play competitor, Babbel, at 13%.
• User Engagement: User satisfaction improved for a third consecutive year, while daily usage among surveyed users rose to 65% from 61% a year earlier. The company's user retention rate also reached an all-time high of 84%.
• Accelerating Growth: Third-party data from SensorTower indicates that daily active user (DAU) growth accelerated to 17% year-over-year in the third quarter so far, up from 12% in the second quarter.

Evercore also noted that while artificial intelligence presents a competitive risk, its data suggests AI adoption has not materially weakened Duolingo's platform. The survey found that over half of language learners using ChatGPT also use Duolingo, with 63% of this overlapping group engaging with Duolingo daily.

Revised Financial Outlook

Based on this analysis, Evercore raised its financial estimates for Duolingo significantly above Wall Street consensus. The firm now forecasts the company will reach 99 million DAUs by 2028, compared to the Street's estimate of 85 million.

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This user growth is expected to drive higher revenue and profit. For 2028, Evercore projects:

• Revenue of $1.79 billion (17% above consensus)
• Adjusted EBITDA of $530 million (22% above consensus)
• GAAP EPS of $5.10 (24% above the consensus estimate of $4.10)

Key Risks to Consider

Despite the bullish outlook, Evercore identified monetization as the key risk to its thesis. The brokerage pointed out that revenue per average DAU declined by 4% year-over-year in the second quarter, while bookings per DAU fell by about 12%.

Other potential risks flagged by the firm include ongoing competition and uncertainty surrounding future pricing strategies and user conversion rates.