Duolingo Inc (NASDAQ:DUOL) has been facing challenges in the market, with its stock down since the first-quarter earnings report on May 8.

Chart: Benzinga Pro

Despite this, JPMorgan analyst Bryan M. Smilek remains optimistic about the company's future.

Smilek maintains an Overweight rating on Duolingo stock. His price target of $275 suggests a potential upside of 46.5% from the current price.

5 Reasons To Buy Duolingo Stock

Smilek recently shared insights into Duolingo's performance and the reasons behind his bullish outlook on the stock. In a research note, he cited several key reasons that could drive the stock's performance in the coming months.

1. Solid Q1 Results: Duolingo shares have dipped since Q1 earnings, despite the fact that they were solid and included a raised 2024 guidance. Smilek notes that 2QTD DAU growth has accelerated "from +54% Y/Y in 1Q", with expectations of continued growth in the coming quarters. "Product optimizations & solid marketing support 50%+ growth in 3Q/4Q," he said.
   
2. Revenue Potential of Duolingo Max: Smilek's model rebuild suggests that Duolingo Max could contribute significantly to revenue, with estimated contributions of $42.6 million in 2024 and $120.9 million in 2025. This, coupled with other growth drivers, could boost revenue and drive the stock price higher.
   
3. Growth in Adj. EBITDA Margins: Duolingo is expected to achieve ~39% incremental Adj. EBITDA margins in 2024, indicating strong potential for profitability and margin expansion.
   
4. Expansion into New Verticals: The company's investments in English learning and new verticals could unlock significant opportunities. Such investments could extend the lifetime value of customers and drive acquisition, engagement, and retention.
   
5. GenAI Competition Mitigated by Duolingo's Strengths: While competition from Generative AI (GenAI) remains a long-term risk, Smilek is confident in Duolingo's positioning. The online education sector broadly believes that "GenAI competition could impact Duolingo's engagement & growth." However, Smilek says Duolingo's deep data moat, proven efficacy, gamification, personalization, and strong brand should support demand and limit competitive pressures.

Smilek's bullish thesis on Duolingo is based on several key factors, including solid Q1 results, the revenue potential of Duolingo Max, growth in Adj. EBITDA margins, expansion into new verticals, and the company's ability to mitigate GenAI competition.

Investors may consider Smilek's analysis and the growth prospects he outlines as they evaluate Duolingo as a potential investment opportunity.

Image: Shutterstock