Duolingo Inc (NASDAQ:DUOL) stock fell after B of A Securities analyst Curtis Nagle downgraded the rating from Buy to Neutral with a price target of $375, up from $355.

The downgrade reflects less upside potential as the stock traded at peak valuation, and near-term estimate revisions may be lower than in prior quarters.

Nagle continued to see Duolingo as one of the highest-quality and most consistent growth names within the Internet and noted the potential for 40% EBITDA margins (versus 26% now) and over 20% GAAP net income margins (versus 13% now) over the long term.

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Duolingo’s ability to grow users virally (marketing is only 11% of sales versus 15% for sub-peers), nearly double subscribers as a percent of users, scale international markets, and expand high ARPU tiers such as Duolingo Max are all compelling long-term growth opportunities.

Duolingo has a strong track record of beating estimates and raising guidance, which has supported an increase in valuation over the past several years (DUOL’s EV/sales multiple increased post-earnings in 9 of the past 11 quarters).

However, the magnitude of beats and raises has narrowed in recent quarters, and valuation is now at peak levels, which, all else equal, sets a much stricter bar going into the fourth-quarter earnings print.

Nagle expects revenues and EBITDA above current Street estimates, but a miss on DAUs or only a modest beat on revenues could negatively impact shares. Both the second quarter of 2024 and the third quarter of 2024 marked lower-than-average beats, and shares rose post-print, but Nagle noted that in the first quarter of 2024, Duolingo reported its most minor beat on DAU and revenue and shares fell nearly 20%.

The price target is based on 14 times 2026 EV/Sales, a premium to high-growth subscription service comps, which trade at 9 times. Nagle noted that the premium is justified given significantly higher projected revenue growth and higher gross and EBITDA margins.

Nagle expects fourth-quarter revenue of $206 million and EPS of $0.46.

Price Action: DUOL stock is down 7.36% at $335.18 at last check Wednesday.

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This article Duolingo Trades At Peak Valuation, Analyst Downgrades It originally appeared on Benzinga.com

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