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DigitalOcean price target lowered to $60 from $67 at BofA 19:43 DOCN BofA analyst Wamsi Mohan lowered the firm's price target on DigitalOcean to $60 from $67 and keeps a Buy rating on the shares ahead of its Q3 results next week. The analyst is boosting his revenue estimate to factor in incremental revenue and customers following the completion of the Cloudways acquisition in September, but he also trims ARPU assumption to reflect his view that incremental usage by existing customers is slowing as SMBs moderate budgets in an uncertain macro backdrop. Show Related Items >>

Over a week ago DigitalOcean downgraded to Sector Weight from Overweight at KeyBanc 10/28 DOCN KeyBanc analyst Michael Turits downgraded DigitalOcean to Sector Weight from Overweight without a price target. Amazon's Web Services Q3 miss and growth declaration compounds concern about a pause/digestion in cloud migration and consumption, Turits tells investors in a research note. Both Amazon last night and Microsoft earlier this week indicated tightening of cloud spending and efforts to help customer "optimize" cloud costs, says the analyst. Given declining estimates and decelerating growth for the two largest hyperscale vendors, Turits lowered estimates for down market-focused cloud infrastructure as a service vendor Digital Ocean and downgraded the shares.
 
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NYSE: DOCN
DigitalOcean Holdings, Inc.
Today's Change
(-3.10%) -$0.94
Current Price
$29.57
DOCN
S&P
Key Data Points
Market Cap
$3B
Day's Range
$28.23 - $30.99
52wk Range
$28.23 - $133.40

The second point, regarding DigitalOcean's profits, is important. As the company has grown, it's been able to negotiate better prices for its hardware and for its facilities, which has led to gross profit margin improvements. And it hired a disciplined chief financial officer in 2019 who has been instrumental in increasing cash from operations and free cash flow (FCF), all while maintaining healthy top-line growth.



DOCN gross profit margin (quarterly) data by YCharts.


DigitalOcean expects to generate $1 billion in revenue by 2024, nearly double what it's generated over the past 12 months. Simply put, that would be impressive. But to reiterate, analysts are worried about economic conditions right now. For example, Oppenheimer analyst Timothy Horan recommends buying DigitalOcean stock and has a price target of $80 per share, according to The Fly -- the highest price target I'm aware of. However, Horan does hedge his bullishness by saying macroeconomic conditions could affect DigitalOcean's customer base of small and medium-size businesses (SMBs), making this coming year "uncertain" for the company.

It's true that the global economy is slowing and that SMBs can disproportionately be affected. It's also true that DigitalOcean employs a usage-based business model that's negatively affected by dwindling activity on its platform. And that could happen because of the aforementioned slowing economy. Therefore, it might be hard to hit its 2024 targets.

That said, the flexibility in DigitalOcean's pricing could actually make it easier to retain customers. If these SMBs experience slowdowns, their costs with DigitalOcean will also go down and save them money. Therefore, it's reasonable to assume the company can keep its customer base during lean times and be poised for higher revenue growth when macroeconomic conditions improve.
 
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