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Here Is Why Duolingo Stock Could Rally After Earnings

Duolingo will report its earnings after the closing bell on March 3rd. With the stock currently sitting 60% below its ATH, could an earnings beat ignite a turnaround rally?

Duolingo’s  (DUOL) - Get Duolingo Inc. Report stock has gotten pummeled in recent months. Dropping over 60% since September of 2021, shares seem to have fallen victim to the market’s exodus from higher-risk, growth-heavy tech stocks.

But now Duolingo has the opportunity to prove that its business fundamentals and growth remain on track. Duolingo bulls believe this stock has been unfairly devalued over the past couple of quarters.

Here's what you should know ahead of Duolingo's Q4 earnings.

Figure 1: Here Is Why Duolingo Stock Could Rally After Earnings

Figure 1: Here Is Why Duolingo Stock Could Rally After Earnings

Duolingo shares hit by macro turbulence

Duolingo, a popular language-learning website and mobile app, had its IPO in July of 2021. The company quickly became a market darling - originally offered up at $102 per share, DUOL popped nearly 40% on its first day of trading and was up nearly 100% by September of 2021. But the stock has been in freefall ever since. Today, shares sit near the $77 mark, well below their IPO price.

High-multiple, non-profitable growth stocks such as DUOL have been hard hit over the past several months. Significant inflation and rising interest rates have created an unfavorable environment for stocks in this category.

And bears have been betting heavily against Duolingo during this period of macroeconomic turbulence. According to Yahoo Finance, short interest in Duolingo currently stands at nearly 16%.

One other notable stat regarding DUOL is that the company’s lean total float of 5.04 million shares is almost entirely owned by institutional investors and insider investors (who own 94% and 3% of total shares, respectively).

Fourth Quarter Earnings Should Put DUOL Back On Track

Duolingo will report its fourth-quarter earnings after the bell on March 3rd. Last quarter, the company reported record paid subscribers. It also reported all-time highs for monthly and daily users: 41 million and 9.8 million, respectively. The success of DUOL’s upcoming fourth-quarter earnings will largely depend on whether or not the company has shown strong continued growth in each of these metrics.

On the financial side of things for Q4, Duolingo expects to report total bookings between $79 million and $82 million and revenues between $66.5 million and $69 million. Market expectations are that the company will report a per-share loss of $0.35 cents and revenues of $68.99 million.

Figure 2: Duolingo's Q4 2021 e FY2021 guidance.

Figure 2: Duolingo's Q4 2021 e FY2021 guidance.

But a strong earnings beat could prove that Duolingo’s fundamentals remain solid, even in spite of the stock’s recent and significant drop in share price. That could cause long-term investors to do some reevaluating.

Also of note, Google recently decided to cut its Play Store transaction fees by 30%. That decision came on the heels of Apple's decision to lower its App Store fees by 15%. These developments could bode well for Duolingo’s 2022 outlook - Duolingo draws a lot of traffic from each of these platforms, and significant fee cuts may have a solid impact on its bottom line going forward.

Wall Street has a "buy the dip" consensus on DUOL

The current consensus among analysts covering Duolingo stock is bullish. Based on three analysts providing ratings on Duolingo during the last three months, Wall Street’s average price target is $150.67. That implies an 80% upside for the next twelve months.

Piper Sandler analyst Arvind Ramnani recently cut his price target to $137 from $182, in large part thanks to the pullback in vertical software. Nevertheless, Ramnani sees Duolingo's business fundamentals as being intact, and he considers the stock to be a high-quality name.

Goldman Sachs’s Erich Sheridan is more cautious; he’s offered a neutral recommendation on DUOL. Still, Sheridan believes that the company has solid user growth and payer conversion potential. He sees the stock as attractively priced for the short-to-medium term - his $120 target price implies an upside of nearly 56%. 

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)