Duolingo's stock soared 15%. Why weren't investors deterred by the plunge in earnings?

Shares of the online language-learning platform Duolingo surged more than 15% in premarket trading on November 4. The company’s profits plummeted by 90%, but growth in the number of users allowed it to raise its full-year forecast.

Duolingo’s third-quarter profit fell 90.7% compared with the same period last year, to $27.2 million. Earnings per share came in at 54 cents: the market had anticipated a decline but expected a result 5.3% higher, notes Barron’s. The company’s revenue, however, exceeded Wall Street’s forecasts: it rose 13.7% to $309 million.

The number of daily active users in the third quarter surged 29% year-over-year, reaching 64.9 million. Audience growth is accelerating: in the second quarter, this figure stood at 23%. Total bookings—that is, the actual amount of payments for subscriptions and in-app purchases—increased by 12%.

“At the beginning of the year, we approved a plan that made the quality of learning and user growth our top priorities. We understood that it would take time to see results, and we are now seeing the acceleration in user growth that we had anticipated,” said Duolingo CEO Luis von Ahn.

Duolingo has raised its annual forecast: the company now expects full-year revenue of $1.22 billion, up from its previous estimate of $1.21 billion. The forecast for total bookings has also been revised upward from $1.29 billion to $1.3 billion.

The company announced that it is testing and rolling out several new features in an effort to boost audience engagement—including experiments with notifications and series of continuous classes.

Following the release of its earnings report, analysts at Evercore ISI reaffirmed their “Buy” rating on Duolingo shares and raised their price target from $128 to $210, implying a 64% increase from the closing price on November 3.

Goldman Sachs analysts maintained a neutral rating on Duolingo shares and also raised their price target from $135 to $140, which is 9% above the latest closing price. The investment bank called the company a leader in the global language learning market: its metrics for user base, engagement, and monetization significantly outperform those of its direct competitors, according to Investing.com. Goldman believes that investors’ attention will now be focused on whether all of this can provide the business with positive operational momentum in the coming quarters.

The most common analyst recommendation for these stocks is “hold”: they have 18 “Hold” ratings. Six analysts recommend buying Duolingo shares, while three suggest selling. The average price target is $136.57, which implies a 6.7% upside potential.

This article was AI-translated and verified by a human editor