Analyst Upgrades Duolingo, Sees Very Different User Experience Than ChatGPT

JMP Securities analyst Andrew Boone upgraded Duolingo, Inc. DUOL from Market Perform to Market Outperform, with a price forecast of $260.

Specifically, the analyst highlighted that a broader rollout of Max, optimization of subscription tiers and Family Plan, and the launch of a conversational experience are material catalysts that can continue to drive growth.

After rolling out Max to 5%-10% of DAU in April, Duolingo plans to expand Max to more users in the coming months, Boone notes. 

Additionally, Duolingo now has a dedicated team focused on improving Family Plan, which can be a meaningful driver of retention.

According to the analyst, with shares down ~21% year to date and ~27% since reporting earnings, valuation is now more reasonable, with the advantage of this pullback and upgrading.

Assuming a monthly ARPU of $13.99 ($167.99 for the annual plan divided by 12) and using the current projection for ARPU of $6.22 for 2025 for Super ARPU, Max can provide a 6%-25% upside to the 2025 subscription revenue projections, the analyst writes. 

Duolingo said that it had begun testing an AI-powered conversational experience whereby users can speak with one of the Duolingo characters. Screenshots of tests on Reddit, Inc. RDDT suggest Duolingo has begun with French with user reactions broadly positive, the analyst adds. The analyst sees conversational experiences significantly increasing the real-world applicability of language learning while helping to accelerate learner proficiency. Importantly, this creates a catalyst for users to upgrade to Max.

For context, the analyst notes that Duolingo is an OpenAI customer and had access to ChatGPT-3 prior to the public launch as this announcement increases confidence that a conversational version of Max can launch in 2024. 

The analyst sees a very different user experience than what is available with ChatGPT, as Duolingo will retain its characters' playful tone with lessons balancing learning and engagement. 

Boone sees conversations to be structured around a course lesson, helping conversations integrate with Duolingo's existing learning structure. 

Price Action: DUOL shares are trading higher by 7.78% to $192.28 at last check Tuesday.

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