What Happened:

Shares of language-learning app Duolingo (NASDAQ:DUOL) jumped 8.5% in the morning session after the S&P Dow Jones Indices announced that the company would join the S&P MidCap 400 index before the start of trading on Monday, April 22, 2024. Being included in the index means that Duolingo will likely be held by many mutual funds and ETFs, which could potentially drive up demand for the stock. We note that while buying of the stock could increase, this development does not change the fundamentals of the company. Revenue growth, expense efficiency, and capital intensity of the business, for instance, are not impacted by index inclusion or exclusion, so this is more of a technical tailwind for the stock.

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What is the market telling us:

Duolingo's shares are somewhat volatile and over the last year have had 27 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business. 

The previous big move we wrote about was 3 days ago, when the company dropped 6.7% after the major indices declined (Nasdaq down -1.70%, S&P 500 down -1.1%, Dow down -0.61%), while yields soared. Geopolitical tension heightened following reports on Saturday, April 13, 2024, that Iran launched drones and missiles at Israel, driving uncertainty about possible disruption to global trade and commerce should the tension escalate. Also, the Census Bureau report revealed March 2024 retail sales rose 0.7% compared to the previous month (ahead of market expectations for a 0.3% increase), suggesting consumption is strong amidst recent inflation concerns. 

Prior to these reports, market volatility had picked up after the March 2024 CPI (Consumer Price Index - a gauge of the average price consumers pay for goods and services) report revealed inflation came in slightly hotter than expected, adding to fears that the Fed could delay rate cut plans in 2024. 

As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. With lower interest rates, investors can apply higher valuations to their stocks. No wonder so many in the investment community are optimistic about 2024. We at StockStory remain cautious, as following the crowd can lead to adverse outcomes. During times like this, it's best to own high-quality, cash-flowing companies that can weather the ups and downs of the market.

Duolingo is down 2.2% since the beginning of the year, and at $209.83 per share it is trading 13% below its 52-week high of $241.21 from December 2023. Investors who bought $1,000 worth of Duolingo's shares at the IPO in July 2021 would now be looking at an investment worth $1,508.

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