Duolingo's Max Could Be An Inflection Point For Subscription Monetization, Analyst Says

JMP Securities analyst Andrew Boone maintains Duolingo Inc DUOL with a Market Outperform rating, raising the price target from $128 to $155.
The analyst expects Duolingo to report better-than-expected 1Q23 results when it reports earnings on May 9, given ongoing strong user engagement on the platform, while he sees Duolingo Max as having the potential to inflect subscription monetization.
Boone is chasing Duolingo higher as shares are up 50% since reporting 4Q earnings. At the same time, he believes strong execution continues, and Duolingo has no meaningful competition within language learning. It is addressing more of its $60 billion opportunity with Max and English-only lessons focused on more advanced learners.
Given that Max moves Duolingo closer to one-on-one tutoring, the analyst believes it could be an inflection point for subscription monetization. At the same time, Birdbrain v2 and growing in-app purchases are tailwinds for 2023. Putting this together, while Duolingo shows greater cost discipline, the analyst recommends shares.
Third-party data suggests an upside to the analyst's 1Q23 DAU, MAU, and subscription booking projections.
Boone's tracking of DAU and MAU implies engagement was better than expected in the quarter, which he believes contributed to in-app revenue data, suggesting his subscription bookings projections are conservative. He considers continued benefits from family plan adoption and ongoing optimization likely to continue to improve subscriber conversion.
Duolingo Max represents a key long-term catalyst. In March, Duolingo launched a higher subscription tier, Duolingo Max, which gives learners access to AI learning tools and features powered by OpenAI's ChatGPT-4.
While Duolingo Max remains early, the analyst believes generative AI is a significant catalyst. LLMs can lower the cost of content creation and improve personalization as it moves closer to becoming one-on-one tutor to language learners, helping more advanced learners and unlocking more of Duolingo's TAM.
Duolingo is exhibiting tighter cost discipline as there is likely an upside to profitability.
At the end of March, Duolingo had 27 open job positions compared to 91 at the end of December. With headcount being Duolingo's most significant expense, the analyst is increasingly confident that the company is at an inflection point in profitability, especially as he expects revenue to outperform.
Price Action: DUOL shares traded lower by 0.90% at $134.85 on the last check Friday.

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