2023-08-11 08:52:33 ET
Morgan Stanley upgraded DigitalOcean ( NYSE: DOCN ) to Equal-weight from Underweight noting that near-term challenges and long-term opportunities are now fairly priced into the stock at current level.
The firm also raised the price target on the shares to $36 from $30.
Morgan Stanley's analysts said that the company's recently lowered growth and margin outlook now appears achievable, and the near-term headwinds and long-term opportunity looks fairly priced.
The analysts added that since they downgraded DigitalOcean in July 2022, the company's management has pushed its $1B revenue target from 2024 to 2025 and reduced 2023 revenue outlook twice. Consensus estimates largely followed guidance lower and the analysts now think that the setup looks achievable.
The firm noted that as the demand environment moved, DigitalOcean emphasized efficiency and successfully steered to a material margin increase, delivering solid FCF and provided commentary targeting 30%+ FCF margins keeping some investors on board even with a lower growth profile.
As of last quarter, FCF margins are expected to be mid-to-high 20%'s in long term. While a part of this lower margin outlook is due to boosted capital requirements to help Paperspace following its acquisition, this indicates a material step lower and contributed to the ~25% T+1 move lower after Q2 earnings, according to the analysts.
With all these events in mind the current valuation seems fair, as per the analysts, as the market is now properly pricing in the lower growth outlook near-term and lower FCF margin outlook longer-term.
The firm also updated its model, giving more credit to the attainability of FCF targets, increasing its 2024 FCF margin to ~26% from ~24%.
DOCN +1.40% to $35.50 premarket Aug. 11
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DigitalOcean gets upgrade at Morgan Stanley on achievable outlook