Key Points
Duolingo has prioritized user growth at the expense of profits.
Yet the company's monetization efforts could be about to take hold.
Shares of Duolingo (NASDAQ: DUOL) rose on Tuesday, following bullish analyst commentary.
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A more favorable risk-to-reward profile
DA Davidson analyst Wyatt Swanson upgraded Duolingo's stock from neutral to buy. Swanson also boosted his share price forecast from $130 to $160, indicating potential gains of nearly 15% for investors who buy shares now.
Swanson argues that many of the risks related to Duolingo's monetization challenges are already priced into its stock following its 60% decline over the past year.
However, he thinks investors are not yet appreciating the language-learning platform's product improvements, fresh marketing campaigns, and new revenue-generation strategies.
Moreover, he believes Duolingo is nearing a turning point after which its bookings growth rate will converge toward its daily active user gains.
Investors love accelerating growth
Duolingo's daily active users jumped 23% year over year to 58.7 million in the second quarter. Paid subscriber growth trailed that pace a bit but still rose a solid 17% to 12.7 million. The company's bookings -- the total cash value of customer purchases plus ad revenue -- increased at a more modest 8% to $289 million.
If Duolingo's new user acquisition and monetization initiatives can help to reaccelerate its bookings growth, its share price could easily trend toward Swanson's $160 price target.
Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Duolingo. The Motley Fool has a disclosure policy.