Duolingo stock gapped higher on Wednesday after Morgan Stanley initiated coverage of the language-teaching software maker with a buy rating.
"Duolingo has the rare combination of rapid user growth, strong and expanding margins, and clear Gen AI upside," analyst Nathan Feather said in a client note. He started coverage of Duolingo stock with an overweight rating and price target of 435, the highest on Wall Street.
On the stock market today, Duolingo stock jumped 10% to close at 370.
Duolingo is underpenetrated in a large total addressable market, Feather said. Its 117 million users represent about 5% of the roughly 2 billion language learners globally, he said.
"With net adds accelerating annually since 2021 and still significant growth in its most mature markets, Duolingo appears far from saturated," Feather said.
Duolingo's unique approach to language learning combines education with gaming. The sticky combination has helped the company reduce subscriber churn, Feather said.
Feather estimates that Duolingo will achieve a five-year compound annual growth rate in revenue of 26%. Further, he sees the company expanding profit margins during that period.
Meanwhile, Duolingo is leveraging generative artificial intelligence technology to improve its service.
"Unlike many peers, Gen AI benefits are not speculative — Duolingo has already demonstrated and quantified contribution," Feather said. "Max, its Gen AI-based subscription tier, is starting to close the gap with human tutors, which allows it to better address the $115 billion (direct-to-consumer) language learning market."
Duolingo stock is on two IBD lists: IBD 50 and Tech Leaders.
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