2023-08-04 12:14:04 ET
DigitalOcean Holdings ( NYSE: DOCN ) stock fell ~23% on Friday after the company cut its FY23 outlook but drew relatively positive reactions from Wall Street.
The company reduced its FY23 total revenue outlook to be between $680M and $685M, compared to prior range of $700M to $720M provided during Q1 results in May; ( consensus for FY23 is $684.63M).
Stifel has started with a Hold rating and a price target of $29 on the stock.
Stifel's analysts said the company decreased its FY23 revenue outlook mainly due to lower-than-expected existing customer expansion in H2'23 ( Net Dollar Retention, or NDR , is expected to decline to the mid-90% range in Q3); while future FCF-margin was reduced due to higher capex requirements. DigitalOcean also found an error in its tax expense calculation so it postponed Q2 EPS results and guidance.
With a large global market opportunity, a solid group of customers for potential up/cross-sell, and ongoing investments in its sales teams and product pipeline, the analysts think the company should be able to sustain 20%+ top-line growth and improve profitability and FCF for the next few years.
The analysts added that looking ahead, while management is hopeful that DigitalOcean returns to double-digit revenue growth in CY24 steered by recent acquisition activity, the analysts are less positive with their forward estimates. Due to their muted expectations they have lower their estimates and reduce the price target on the stock to $29.
William Blair reiterated its Outperform rating on DigitalOcean and the analysts believe the company's unique position in a massive market, plus solid revenue growth and improving profitability, call for an in-line premium multiple compared with the peer group.
The firm noted that the company's reduced FY23 outlook, which calls for 18% revenue growth, was attributed to persistent macro pressure impacting NRR (down to 104%). While churn has remained steady, DigitalOcean continues to see higher levels of contraction (as customers focus on optimizing their existing workloads and spend) and a lower rate of expansion for renewals.
Nonetheless, the analysts see a several positives coming out of Q2, including solid growth of CloudWays (rising 45% in the quarter) and the recent acquisition of Paperspace, which will start steering incremental revenue ($5M in 2023 and three percentage points growth in 2024) as it expands DigitalOcean's reach into GPU-based AI workloads (such as LLM training and customization).
In addition, the company remains focused on managing expenses and reiterated its adjusted EBITDA and free cash flow targets, despite lower revenue expectations and an uptick in investments related to Paperspace, according to the analysts.
As these AI tailwinds start to kick in and as comps become easier in 2024 (as cost optimizations wind down in 2023), the analysts anticipate to see reacceleration in revenue thoughout the year. Thus reiterating their Outperform rating.
More on DigitalOcean
- DigitalOcean: Deep Value Tech Stock, Pure-Play Cloud Computing Provider
- DigitalOcean: Sinking Or Swimming?
For further details see:
DigitalOcean stock falls ~20 after FY23 outlook cut; analysts remain positive