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On Monday, Stifel analysts adjusted their outlook on DigitalOcean stock (NYSE: DOCN), reducing the price target to $33 from the previous $40, while maintaining a Hold rating on the shares. The stock, currently trading at $28.65, has experienced significant volatility, declining 14.2% in the past week and 31.3% over the last six months. According to InvestingPro analysis, the stock appears to be trading near its Fair Value, with 9 analysts recently revising their earnings estimates upward for the upcoming period. The revision follows Stifel’s attendance at DigitalOcean’s investor day last Friday, where the company’s management presented strategies aimed at accelerating growth. The plan includes focusing on larger customers, refining its market approach, and leveraging its user-friendly AI platform to potentially increase revenue growth. The company’s current revenue stands at $780.62 million, with a healthy gross profit margin of 59.7%. For deeper insights into DigitalOcean’s growth potential and comprehensive analysis, InvestingPro subscribers can access the detailed Pro Research Report, one of 1,400+ available for top US stocks.
DigitalOcean’s management is confident that these initiatives could add an additional 5-7 percentage points to its top-line growth. When combined with the current low-teens revenue increases, the company expects to achieve 18-20% revenue growth by 2027. However, the pursuit of accelerated growth is anticipated to come at a cost, with expectations for unlevered free cash flow (uFCF) margins to compress by 3-4 percentage points, settling in the mid-teens. This margin compression is attributed to heightened investments in capital expenditures, sales and marketing, and research and development.
Moreover, DigitalOcean is facing a refinancing challenge this year for its $1.5 billion, 0% convertible note, which is currently trading at approximately a 4.2% yield to maturity (YTM). As the note approaches its current status, the refinancing process is expected to affect the company’s reported free cash flow (FCF) due to the new cost of capital. Despite these challenges, InvestingPro data shows the company maintains strong liquidity with a current ratio of 2.45, and generated $104.56 million in levered free cash flow over the last twelve months.
Stifel acknowledges DigitalOcean’s strategic focus on growth acceleration as the appropriate path forward, as indicated by their recent analysis using the Weighted Rule of 40. Nevertheless, the firm advises caution, citing near-term uncertainties related to the company’s balance sheet and the general environment for GPU pricing. Consequently, Stifel retains a Hold rating on DigitalOcean stock as it navigates these financial headwinds.
In other recent news, DigitalOcean has been the focus of several analyst reviews and company updates. Canaccord Genuity adjusted its price target for DigitalOcean to $45 from $50, maintaining a Buy rating. They highlighted the company’s strong free cash flow and growth potential despite broader market uncertainties. Needham reiterated a Hold rating, noting DigitalOcean’s strategic initiatives for growth, although expressing caution due to economic sensitivity among its customer base. Stifel also maintained a Hold rating while lowering their price target to $33, citing near-term balance sheet challenges and expected margin compression due to increased investment.
Meanwhile, Citizens JMP reaffirmed a Market Outperform rating with a $55 price target, emphasizing DigitalOcean’s innovation and leadership under CEO Paddy Srinivasan. Additionally, DigitalOcean announced the general availability of its Partner Network Connect service, aimed at improving multi-cloud and hybrid-cloud networking for businesses. This new service, developed in collaboration with Megaport, offers enhanced security and performance by allowing private connections between DigitalOcean’s cloud and other providers. These developments reflect DigitalOcean’s efforts to adapt and expand in a competitive cloud market.
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