Duolingo’s Intrinsic Value Exceeds Current Share Price by 53%

Is Duolingo, Inc.'s (NASDAQ:DUOL) current share price reflective of its true value? Recent analysis suggests that Duolingo's intrinsic value may be 53% higher than its current market price. This valuation is calculated using the Discounted Cash Flow (DCF) model, which estimates the company's future cash flows and discounts them to present value.

The DCF model is one of several methods for estimating a company's value, utilizing a two-stage growth rate model to project cash flows. The first stage assumes higher growth, while the second stage assumes lower growth. After estimating cash flows for ten years, their present value is calculated.

Subsequently, the Terminal Value is calculated to account for all future cash flows beyond the ten-year period. This value is determined using the five-year average of the ten-year government bond yield, discounted to present value. Duolingo's total equity value is estimated at approximately $22 billion, indicating a 35% discount compared to the current share price.

The calculation heavily depends on assumptions regarding the discount rate and cash flows, with the stock's volatility, represented by beta, also considered. For Duolingo, a levered beta of 0.850 was used, applying a 7.0% discount rate, deemed reasonable for a stable business.

Valuation is only one aspect of forming an investment thesis, and many factors should be assessed. The DCF model is not a perfect tool for stock valuation, and different scenarios and assumptions should be applied to evaluate the company's value.