Stifel cuts DigitalOcean stock price target to $33 from $40

On Monday, Stifel financial analysts adjusted their outlook on DigitalOcean (NYSE: DOCN) shares by reducing the price target to $33 from the previous $40 while keeping a Hold rating on the stock. The revision follows DigitalOcean’s recent investor day, which took place last Friday, where the company’s management shared their strategy to drive growth. The new plan aims to attract larger customers, broaden the go-to-market approach, and leverage its user-friendly AI platform. The stock has experienced significant volatility recently, with a 14.2% decline in the past week and currently trading at $28.65. According to InvestingPro analysis, the stock’s RSI suggests oversold conditions, presenting a potential opportunity for investors.

DigitalOcean’s management is confident that these initiatives could contribute an additional 5-7 percentage points to the company’s top-line growth. They anticipate that these efforts, along with the recent low-teens revenue increases, will enable the company to achieve 18-20% revenue growth by 2027. However, the company’s pursuit of growth is expected to come at a cost, with management projecting a contraction in unlevered free cash flow (uFCF) margins by 3-4 percentage points, settling in the mid-teens. This margin compression is attributed to heightened investments in capital expenditures, sales and marketing (S&M), and research and development (R&D).

Furthermore, DigitalOcean faces balance sheet challenges, notably the need to refinance its $1.5 billion convertible note with a 0% coupon rate, which is currently trading at approximately a 4.2% yield to maturity (YTM). The refinancing is required this year before the note becomes current, and the new cost of capital is expected to impact the reported free cash flow (FCF).

While Stifel acknowledges the importance of DigitalOcean’s growth acceleration strategy and its potential benefits, as indicated in their recent analysis using the Weighted Rule of 40 for SaaS companies, the firm advises caution. The near-term uncertainties surrounding the company’s balance sheet and the general pricing environment for graphics processing units (GPU) have led Stifel to maintain their Hold rating on DigitalOcean shares. With a current ratio of 2.45 and trading at an EV/EBITDA multiple of 17.23x, InvestingPro data suggests the stock is slightly undervalued relative to its Fair Value, despite recent market challenges.

In other recent news, DigitalOcean Holdings Inc (NYSE:DOCN). reported its fourth-quarter 2024 earnings, exceeding market expectations with an earnings per share (EPS) of $0.49, surpassing the forecast of $0.38. The company also reported revenue of $255 million, which was significantly higher than the anticipated $200.16 million. Additionally, DigitalOcean has set its 2025 revenue guidance between $870 million and $890 million, indicating a continued growth trajectory. In another development, DigitalOcean has launched its Partner Network Connect service, which aims to improve multi-cloud and hybrid-cloud networking for businesses by offering secure, high-performance private connections. This new service is expected to benefit industries such as FinTech, Healthcare, and SaaS providers. Analysts from Citizens JMP and JMP Securities have maintained a Market Outperform rating for DigitalOcean, with a price target of $55, citing the company’s innovation and leadership as key growth drivers. DigitalOcean’s recent advancements include the introduction of an AI platform that allows users to create AI agents and a strategic partnership with Advanced Micro Devices (NASDAQ:AMD). These developments reflect DigitalOcean’s commitment to expanding its offerings in the cloud and AI sectors.

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