Shares of language-learning app Duolingo (DUOL -2.31%) popped on Thursday after the stock was added to the S&P MidCap 400 index. As of 10 a.m. ET, Duolingo stock was up 6% but it had been up as much as 12% in earlier trading.
Should investors actually care about this?
Investors should concern themselves with news regarding Duolingo's business. By contrast, this news has more to do with the stock. Duolingo stock will officially be a member of the S&P MidCap 400 index on Monday. Between now and then, index funds that track this index must buy shares of Duolingo so that the funds accurately reflect the index. This creates buying pressure and partly explains why Duolingo stock is up today.
I wouldn't suggest investors read too much into this news since it's not material to Duolingo's business. The company's ability to attract users, grow revenue, and turn a profit is the same regardless of what index it's a member of.
What to do now
All of this said, I wouldn't say that this news is entirely irrelevant for Duolingo investors. Being added to the index is a recognition of its extraordinary financial results since it went public in 2021.
In 2023, Duolingo grew revenue by 44% as its user base grew and as many users elected to pay for premium subscriptions. It also turned a real net profit of $16 million, making it one of only a few companies that's high-growth and profitable. And it's cash-rich and debt-free.
Duolingo is scheduled to report quarterly financial results on May 8. Investors should look at user growth, operational discipline, and commentary from management regarding newer initiatives such as its other apps for learning. Assuming these areas continue with historical trends, Duolingo stock could keep performing well for investors.
