Duolingo (NASDAQ:DUOL) reported excellent Q2 earnings on Aug. 11, essentially riding a wave of growth in language learning. The company just went public on July 26, raising about $406.2 million at $102 per share, according to its prospectus. (This was on top of the $114.6 million it already held, giving it a total of $520.8 million in cash). The problem is DUOL stock is now probably overvalued, given that its market value is $4.72 billion, as of Aug. 19, at $126.16 per share.

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I can say this because we now know how many shares Duolingo has outstanding. The company reported on Aug. 12 in its 10-Q, its total share count was 37.418 million shares (which was higher than the shares indicated in the prospectus).

Moreover, given that its quarterly revenue was just $59 million, this puts the stock at a high price-to-sales (P/S) and EV-to-EBITDA valuation. There are no analysts covering the stock yet, so let’s look into this further and do our own calculations.

What Duolingo Is Likely Worth

Duolingo has a “freemium” business model with its language learning app. Only 4% of so of its users actually subscribe to the company’s monthly or annual subscription plan. In addition, it makes a small amount of money from advertising and commissions on English tests.

Last quarter it made $58.8 million in revenue. This was 47% higher than the same quarter last year, but just 6.2% over its Q1 revenue of $55.36 million (see the 10-Q). If we were to annualized its Q2 number it works out to $235.2 million. However, this assumes there will be no growth for the rest of the year. Therefore, if we were to assume a quarterly 6% growth rate for the next two quarters, then 2021 sales could hit $242.56 million. This is higher than the upper range of the company’s own forecast of $236 to $242 million.

Therefore, you can see that the P/S multiple for DUO stock for 2021 is 19.5 times (i.e., $4.72 billion/$242.56 million). That is a very high multiple. Let’s assume that revenue will grow 50% (i.e., $242.56 million/ 2020 sales of $161.7 million). That means the forward P/S multiple will be 13 times (i.e., $4.72 billion/$363.8 million).

Adjusting the Forecast

But, it’s not realistic to assume 50% growth for 2022. For example, its Q2 quarter-over-quarter growth of 6.2% implies just 27.2% annual growth. That is only just over half of 50% growth. As a result, using 27.2% brings the 2022 forecast to $308.53 million. This means its P/S metric is higher at 15.3 times.

The problem is that is probably at least 50% to 75% higher than it should be. Moreover, it won’t be making money in 2022.

For example, in Q2 Duolingo did a good job making money. Apparently, despite a net income loss of $176,000 in Q2, Duolingo had adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of positive $3.7 million.

However, the company said in its outlook section that adj. EBITDA will turn negative by the end of 2021 to negative $14 million. This might happen if the company expects to increase its cost base now that it has $520 million in cash in the bank. So this could push its valuation even lower. I suspect that based on this the P/S valuation should be no more than 10 times.

What DUOL Stock Is Worth

That means that its future value should be no more than $3.085 billion (i.e., 10 x $308.5 million in 2022 sales). This is 65.36% of its $4.872 billion market value. It implies a 34.64% downturn in the stock.

In other words, DUOL stock is not worth more than $82.46 per share (i.e., 65.36% x $126.16 per share as of Aug. 19).

Most defensive investors will wait for the stock to fall to at least $82.46 per share or 35% lower. They should also wait to see if its next quarter results in better than 6.2% QoQ growth and if the company has a positive adj. EBITDA cash flow performance.