Soaring Duolingo isn’t cheap, but Morgan Stanley says potential growth is worth it

One of the big winners Wednesday was language-learning app Duolingo, which rose 10% after yesterday’s 6.4% climb, the best two-day run for the stock since August 2024.

The stock may have gotten a little extra oomph from Morgan Stanley equity analysts, who initiated coverage on the company with an “overweight” rating — essentially a “buy” — and slapped a price target of $435 on the stock, roughly 18% higher than where Duolingo closed the day. They wrote:

“We see DUOL as a best-in-class consumer internet asset. Its unique, gamified approach to learning allows it to combine the mobile gaming and language learning markets for a $220B [total addressable market], of which it has just ~0.5% share. Underpenetrated with a long runway for growth, we see three key pieces to DUOL's growth algorithm.

1) Users. At the top of the funnel, DUOL's ~117M users represent just ~5% of the approximately 2 billion language learners globally. With net adds accelerating annually since 2021 and still significant growth in its most mature markets, DUOL appears far from saturated. 2) Engagement. The key to language learning is retention. DUOL's test and learn approach to gamification should lead to consistent expansion in usage frequency and duration. 3) Monetization. Despite a >2.5x increase in revenue per user over the past five years, DUOL still monetizes users ~5x below mobile peers. To date, DUOL has primarily monetized convenience (no ads). We believe the recent addition of product-first subscriptions could drive a step-function improvement in monetization. With each growth vector magnifying the others we see DUOL as a structural compounder and model a 26% 5-year revenue CAGR.”

For sure, a lot of good news is already priced into the stock. The shares are up nearly 70% over the past year, compared to a 6% gain for the S&P 500 and a drop of 4% for the S&P MidCap 400 Index — of which Duolingo is a member.

For that reason, Duolingo ain’t cheap, with the market slapping a 120x forward price-to-earnings multiple on it, or about 60x forward EBITDA. But Morgan Stanley analysts argue that the company’s growth prospects make it worth the risk of buying in at an arguably pricey multiple, comparing it to the valuation investors put on well-established internet-based subscription service Netflix.

“Although expensive, it is not without precedent as we have seen various consumer internet names trade above 30x EBITDA while sustaining high user growth, such as NFLX from 2014-2021. The risk of multiples de-rating on a user-growth slowdown is real, but without signs of growth cracking we think the bigger risk is missing DUOL's compounding growth.”

The company reports earnings next Thursday, May 1, after the close. We’ll cover it here as we did last quarter. And if you’re interested in learning more about the company, check out our interview with Duolingo CEO Luis van Ahn from last year.

Update: Corrected Duolingo CEO’s first name to Luis.