Shares of Digital Turbine (NASDAQ:APPS), a company specializing in app installation software, were flying higher today after it was announced it’s being added to the S&P MidCap 400 index. As of 9:45 a.m. EDT, the stock was up a cool 11%.
To explain why this news leads to an increase in share price, let’s talk about supply and demand. According to Yahoo! Finance, Digital Turbine has a float of almost 87 million shares; that’s the supply of shares out there to be bought and sold.
When a stock is added to an index, like Digital Turbine to the S&P MidCap 400 index, exchange-traded funds (ETFs) begin purchasing shares so they can keep tracking the index’s performance. In other words, there’s suddenly increased demand for Digital Turbine stock, and that’s why it popped today.
Just because Digital Turbine stock jumped this morning doesn’t mean it will hold its gains. Getting added to an index is a short-term influence on the stock. Today’s news will fade in significance in time. Consider that every stock in the S&P MidCap 400 was added at some point and likely enjoyed the same initial pop. But some eventually start underperforming the market, like the company Digital Turbine is replacing, Ligand Pharmaceuticals.
Positive business results will send Digital Turbine stock higher in the long term. For the upcoming second quarter, the company believes it will surpass $300 million in revenue, an increase of more than 40% from the first quarter and up over 300% year over year. Some of this is from acquisitions, but its core business is also growing at a strong pace.
Digital Turbine needs to keep building on its recent winning streak if it’s going to be a sustainable market beater. Therefore, don’t let today’s short-term news distract your gaze from what really matters.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.