Duolingo stock jumps as charts flash warning amid transition from growth to value

Duolingo stock has crawled back in the past few months, moving to its highest point since January this year. DUOL soared to $162, up by 77% from its lowest level this year. There is a risk that the stock may be on the verge of a reversal.

Duolingo is in a transition from growth to value

Duolingo, the popular online learning platform, is facing some major challenges as its business model is disrupted by artificial intelligence (AI) tools. 

As a result, the management has decided to focus on its user growth, with the goal of boosting its active users from 58.7 million today to 100 million in the coming years. 

To do that, the company is adding more services like chess and maths, and boosting its marketing spending. These activities have had an impact on its margins, with its net profit margin falling to 11.8% from the previous 17.8%.

The most recent results showed that Duolingo’s paid subscribers rose by 17% YoY to 12.7 million, while its revenue jumped by 18% to $298 million. Its results also showed that its net income falling by 26% to over $33 million. 

The management and analysts expect the company’s growth to continue in the coming quarters. For example, analysts expect the upcoming earnings to show that its revenue rose by 11.45% in Q3 to $302 million. For the year, analysts expect the revenue to jump by 16% to $1.22 billion, followed by 13% next year. 

These numbers imply that the company is in a transition from growth to value, meaning that its valuation multiples will need to be adjusted. Indeed, the forward price-to-earnings ratio has dropped to 22, much lower than its historical level. This multiple is in line with that of the S&P 500 Index.

Some analysts believe that Duolingo stock has more upside to go. For example, Evercore analysts believe that the shares will jump to $210, up by about 35% from the current level. However, many analysts have a mild outlook for the shares, with JPMorgan’s Bryan Smilek boosting his target from $125 to $135, down from where it is today. 

Duolingo stock faces a technical risk

DUOL stock chart | Source: TradingView

The risk, however, is that the DUOL stock is facing some technical risks. One of them is that it is forming a rising broadening wedge pattern, a common bearish reversal sign in technical analysis. This pattern is made up of two ascending and diverging trendlines. 

The two lines of the Percentage Price Oscillator (PPO) have jumped in the past few months. Also, the stock remains above the 100-day Exponential Moving Average (EMA). 

While these are bullish signs, the rising broadening wedge and the forming abandoned baby candle points to a reversal, potentially to the key support of $134. A move above the upper side of the wedge will point to more gains.