Duolingo Downgraded Despite Executing 'Exceptionally Well,' Analyst Warns Of Risk/Reward Imbalance

Shares of Duolingo Inc DUOL came under pressure in early trading on Monday.

The stock has risen by 78% since the second-quarter earnings release, which makes the risk/reward negative, despite the company likely to report strong results for the third quarter, according to JMP Securities.

Analyst Andrew Boone downgraded the rating for Duolingo from Market Outperform to Market Perform.

The Duolingo Thesis: Management seems likely to continue to "execute exceptionally well," Boone said in the downgrade note.

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"The company is going through a significant product cycle with Video Calls unlocking both new experiences for learners and improving conversion," he added.

Duolingo can top the current consensus estimates, given its ability to sustain growth, its "compounding product improvements," AI unlocking conversational learning and gains in "advanced learners" still being in early stages, the analyst said.

He added, however, that the current stock valuation already reflects "Duolingo's newer product initiatives."

While historically, about 50% of the company's user growth came from new users, its growth is now "more dependent on resurrected users, especially in high monetization markets," Boone further wrote.

DUOL Price Action: Shares of Duolingohad declined by 0.6% to $288.02 at the time of publication on Monday.

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