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Duolingo Inc (NASDAQ:DUOL) shares have been downgraded from Overweight to Sector Weight by KeyBanc Capital analyst Justin Patterson Monday.
The downgrade comes after shares exceeded the firm’s previous price target, with Patterson saying they “now appropriately reflect the product cycle.”
“Given headwinds from inflation and signs of softness in other freemium apps, we believe multiple expansion and material revisions are less likely over the coming quarters. As such, we view risk/reward as balanced,” wrote Patterson.
The analyst continued, outlining four reasons why their view has now changed. These included “DUOL’s 2023E EV/S and EV/GP multiples of 9.9x/13.4x are ~2.5x that of peers,” its freemium businesses showing signs of softness, the advertising industry moderating, and new app monetization still being distant.
Speaking on the multiples, Patterson added that while they appear reasonable due to Duolingo growing roughly twice as fast as its peers, they believe Duolingo needs a more meaningful revision cycle for further appreciation.
However, Patterson added that if there were to be an app rebrand or new features or app monetization, they could be wrong in their assessment.
“Duolingo rolled out pricing for businesses on Friday. We note Duolingo has had minimal success with businesses in the past, and we believe new initiatives take time to scale. Nevertheless, any success here would be incremental to our forecast,” concluded Patterson.
Duolingo stock plunged 13% during Monday’s session.
