Duolingo (DUOL 5.89%) investors got some good news on Tuesday, when for the first time in nearly six months, an analyst began covering the language learning stock with a better rating than just “neutral.”

On Tuesday, Seaport Global Securities initiated coverage of Duolingo with a “buy” rating and a $222 price target, as StreetInsider.com reports. Admittedly, Seaport set a high bar for Duolingo, noting that it’s valuing the stock at a whopping 12 times the revenues Duolingo might collect in 2025. But the analyst thinks this price is justified, calling Duolingo the clear leader in online language learning, and predicting the stock will increase sales by a compound annual growth rate (CAGR) of 20% or better over the long term.

Is Duolingo stock a buy?

Is Seaport right? On the one hand, the analyst’s sales prediction looks reasonable. S&P Global Market Intelligence data show Duolingo averaging 46% annual sales growth over the last two years — more than twice the rate of growth that Seaport forecasts. And gross profit margins are expanding even faster, averaging 47% growth.

That reinforces Seaport’s contention that Duolingo will grow profits faster than sales in future years. As it expands internationally and converts “freemium” users into paid subscriptions, Seaport sees Duolingo driving 35% or better growth in earnings before interest, taxes, depreciation, and amortization (EBITDA).

That said, $222 seems a very optimistic price target. EBITDA or no EBITDA, Duolingo stock still isn’t profitable at present — although it’s getting close with GAAP net losses of only $10 million over the last 12 months. Still, Duolingo stock looks priced for perfection at a share price of about $195 as I type these words.

Valued on analysts’ expected earnings of $0.24 this year, the stock looks very expensive at more than 800 times current-year earnings. And even taking next year’s predicted profits for granted (which you shouldn’t), and applying Seaport’s $222 price target to them, the analyst seems to be arguing that 250 times forward earnings is not too rich a price to pay for Duolingo stock.

I disagree.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Duolingo. The Motley Fool has a disclosure policy.

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