UBS Raises Price Target on Duolingo to $408 From $355, Maintains Buy Rating

Duolingo, Inc. (DUOL) has recently been on Zacks.com's list of the most searched stocks. Therefore, you might want to consider some of the key factors that could influence the stock's performance in the near future.

Over the past month, shares of this company have returned +10.4%, compared to the Zacks S&P 500 composite's +3.3% change. During this period, the Zacks Technology Services industry, which Duolingo falls in, has gained 14%. The key question now is: What could be the stock's future direction?

Although media reports or rumors about a significant change in a company's business prospects usually cause its stock to trend and lead to an immediate price change, there are always certain fundamental factors that ultimately drive the buy-and-hold decision.

Earnings Estimate Revisions

Here at Zacks, we prioritize appraising the change in the projection of a company's future earnings over anything else. That's because we believe the present value of its future stream of earnings is what determines the fair value for its stock.

Our analysis is essentially based on how sell-side analysts covering the stock are revising their earnings estimates to take the latest business trends into account. When earnings estimates for a company go up, the fair value for its stock goes up as well. And when a stock's fair value is higher than its current market price, investors tend to buy the stock, resulting in its price moving upward. Because of this, empirical studies indicate a strong correlation between trends in earnings estimate revisions and short-term stock price movements.

For the current quarter, Duolingo is expected to post earnings of $0.49 per share, indicating a change of +88.5% from the year-ago quarter. The Zacks Consensus Estimate has changed +6.3% over the last 30 days.

For the current fiscal year, the consensus earnings estimate of $2.02 points to a change of +477.1% from the prior year. Over the last 30 days, this estimate has changed +8.3%.

For the next fiscal year, the consensus earnings estimate of $3.04 indicates a change of +50.5% from what Duolingo is expected to report a year ago. Over the past month, the estimate has changed +8.1%.

With an impressive externally audited track record, our proprietary stock rating tool -- the Zacks Rank -- is a more conclusive indicator of a stock's near-term price performance, as it effectively harnesses the power of earnings estimate revisions. The size of the recent change in the consensus estimate, along with three other factors related to earnings estimates, has resulted in a Zacks Rank #2 (Buy) for Duolingo.

The chart below shows the evolution of the company's forward 12-month consensus EPS estimate:

12 Month EPS

Projected Revenue Growth

While earnings growth is arguably the most superior indicator of a company's financial health, nothing happens as such if a business isn't able to grow its revenues. After all, it's nearly impossible for a company to increase its earnings for an extended period without increasing its revenues. So, it's important to know a company's potential revenue growth.

In the case of Duolingo, the consensus sales estimate of $204.6 million for the current quarter points to a year-over-year change of +35.5%. The $743.09 million and $961.14 million estimates for the current and next fiscal years indicate changes of +39.9% and +29.3%, respectively.

Last Reported Results and Surprise History

Duolingo reported revenues of $192.59 million in the last reported quarter, representing a year-over-year change of +39.9%. EPS of $0.49 for the same period compares with $0.06 a year ago.

Compared to the Zacks Consensus Estimate of $188.67 million, the reported revenues represent a surprise of +2.08%. The EPS surprise was +36.11%.

The company beat consensus EPS estimates in each of the trailing four quarters. The company topped consensus revenue estimates each time over this period.

Valuation

No investment decision can be efficient without considering a stock's valuation. Whether a stock's current price rightly reflects the intrinsic value of the underlying business and the company's growth prospects is an essential determinant of its future price performance.

While comparing the current values of a company's valuation multiples, such as price-to-earnings (P/E), price-to-sales (P/S) and price-to-cash flow (P/CF), with its own historical values helps determine whether its stock is fairly valued, overvalued, or undervalued, comparing the company relative to its peers on these parameters gives a good sense of the reasonability of the stock's price.

As part of the Zacks Style Scores system, the Zacks Value Style Score (which evaluates both traditional and unconventional valuation metrics) organizes stocks into five groups ranging from A to F (A is better than B; B is better than C; and so on), making it helpful in identifying whether a stock is overvalued, rightly valued, or temporarily undervalued.

Duolingo is graded F on this front, indicating that it is trading at a premium to its peers. Click here to see the values of some of the valuation metrics that have driven this grade.

Bottom Line

The facts discussed here and much other information on Zacks.com might help determine whether or not it's worthwhile paying attention to the market buzz about Duolingo. However, its Zacks Rank #2 does suggest that it may outperform the broader market in the near term.

Zacks Investment Research

Duolingo, Inc. (DUOL) appears an attractive pick given a noticeable improvement in the company's earnings outlook. The stock has been a strong performer lately, and the momentum might continue with analysts still raising their earnings estimates for the company.

Analysts' growing optimism on the earnings prospects of this company is driving estimates higher, which should get reflected in its stock price. After all, empirical research shows a strong correlation between trends in earnings estimate revisions and near-term stock price movements. This insight is at the core of our stock rating tool -- the Zacks Rank.

The five-grade Zacks Rank system, which ranges from a Zacks Rank #1 (Strong Buy) to a Zacks Rank #5 (Strong Sell), has an impressive externally-audited track record of outperformance, with Zacks #1 Ranked stocks generating an average annual return of +25% since 2008.

For Duolingo, strong agreement among the covering analysts in revising earnings estimates upward has resulted in meaningful improvement in consensus estimates for the next quarter and full year.

Current-Quarter Estimate Revisions

For the current quarter, the company is expected to earn $0.49 per share, which is a change of +88.46% from the year-ago reported number.

Over the last 30 days, the Zacks Consensus Estimate for Duolingo has increased 6.32% because four estimates have moved higher while one has gone lower.

Current-Year Estimate Revisions

The company is expected to earn $2.02 per share for the full year, which represents a change of +477.14% from the prior-year number.

There has been an encouraging trend in estimate revisions for the current year as well. Over the past month, six estimates have moved up for Duolingo versus no negative revisions. This has pushed the consensus estimate 8.3% higher.

Favorable Zacks Rank

The promising estimate revisions have helped Duolingo earn a Zacks Rank #2 (Buy). The Zacks Rank is a tried-and-tested rating tool that helps investors effectively harness the power of earnings estimate revisions and make the right investment decision. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Our research shows that stocks with Zacks Rank #1 (Strong Buy) and 2 (Buy) significantly outperform the S&P 500.

Bottom Line

Investors have been betting on Duolingo because of its solid estimate revisions, as evident from the stock's 12.8% gain over the past four weeks. As its earnings growth prospects might push the stock higher, you may consider adding it to your portfolio right away.

Zacks Investment Research