Language app company Duolingo, Inc. (DUOL) made its stock market debut on July 28, 2021, and soared nearly 35%, opening at $102 per share. It has approximately 40 million active users and 500 million app downloads. However, the stock has lost 11.2% over the past month to close yesterday’s trading session at $142.49. In addition, it is currently trading 22.1% below its all-time high of $205, which it hit on September 22, 2021.

The company’s losses widened in the second quarter, and it is expected to continue reporting losses in the upcoming quarters. Also, its trailing-12-month net income margin, ROTC, and ROA are negative compared to the industry averages of 6.29%, 7.56%, and 6.28%, respectively. So, DUOL’s near-term prospects look bleak.

Here’s what could shape DUOL’s performance in the upcoming months:

Top Line Growth Doesn’t Translate into Bottom Line Improvement

For the fiscal second quarter ended June 30, 2021, DUOL’s revenue surged 47% year-over-year to $58.80 million. The company’s gross profit increased 51.3% year-over-year to $42.67 million.

However, its operating expenses for the quarter increased 53.4% year-over-year to $43.14 million. In comparison, its operating loss came in at $478,000, compared to an income of 82,000 in the prior-year period. Its net loss came in at $176,000, compared to an income of 40,000 in the year-ago period.

China Worries

DUOL’s app has been delisted from several Chinese app stores recently. As Beijing’s broad mandate required ed-tech firms to become non-profit, it has banned foreign curriculums, imported textbooks, and hiring foreign teachers. This is expected to hurt the company’s revenues.

Stretched Valuation

In terms of forward P/CF, DUOL’s 747x is 5,740% higher than the industry average of 12.79x. Likewise, its forward P/S of 22.55x is 1,769.6% higher than the industry average of 1.21x. Moreover, the stock’s EV/S of 23.81x is 1,568.4% higher than the industry average of 1.43x.

POWR Ratings Reflect Bleak Prospects

DUOL has an overall rating of D, which equates to Sell in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. DUOL has a D grade for Growth. This is justified as analysts expect its EPS to remain negative in fiscal 2021 and 2022.

DUOL has a D grade for Value, in sync with its higher-than-industry valuation ratios. In addition, the stock has a D grade for Stability.

We've also rated DUOL for Quality, Momentum, and Sentiment in addition to the POWR Ratings grades I’ve just highlighted. Click here to get all the DUOL ratings.

Moreover, DUOL is ranked #105 of 155 stocks in the Software – Application industry.

Bottom Line

DUOL’s near-term prospects look bleak as its monthly active users were 37.9 million in the second quarter, down 3% from the prior year quarter. Also, analysts expect its EPS to remain negative in the current year and next year. So, the stock looks overvalued at the current price level and is best avoided now.

How Does Duolingo (DUOL) Stack Up Against its Peers?

While DUOL has an overall POWR Rating of D, you might want to consider investing in the following Software - Application stocks with an A (Strong Buy) rating: Open Text Corporation (OTEX), Commvault Systems, Inc. (CVLT), and National Instruments Corporation (NATI).

DUOL shares were unchanged in after-hours trading Wednesday. Year-to-date, DUOL has gained 1.76%, versus a 17.46% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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