What happened
DigitalOcean Holdings (DOCN 3.30%) stock is surging in this week's trading. The cloud-infrastructure company's share price was up 21.4% as of 3:30 p.m. ET Friday compared to its price at last week's market close, according to data from S&P Global Market Intelligence.
DigitalOcean seems to have gotten a boost from three main things: comments from Russian and Ukrainian officials pointing toward the possibility of the war in Ukraine being resolved in the not-too-distant future, market relief after the Federal Reserve opted for a quarter-point interest rate hike instead of a half-point raise, and news of a recent acquisition. The company announced Tuesday that it had purchased CSS-Tricks, a website platform for learning web development.
Image source: Getty Images.
So what
Risk-off sentiment driven by Russia's invasion of Ukraine, high inflation, and concerns about what path the Fed would take with interest rate hikes prompted big sell-offs for DigitalOcean and other growth-dependent software stocks last week. However, the company's share price is now seeing recovery momentum with signs that threats posed by the Russia-Ukraine situation and rate increases may be moderating somewhat. The stock also posted gains in conjunction with its latest acquisition announcement.
DigitalOcean published a message on Twitter, followed by a press release, on Tuesday announcing that it had bought CSS-Tricks. The amount the company was paying to acquire the web-development-learning resource wasn't disclosed, but DigitalOcean said the move would bolster its community strategy and add to its already extensive developer support offerings.
Now what
Like many other software stocks, DigitalOcean's valuation has seen a big pullback this year as investors have become more risk-averse and reassessed what constitutes reasonable valuation multiples for companies in the industry. The company's share price is down roughly 27% across 2022's trading and 56% from the high it hit last November.
DigitalOcean now has a market capitalization of roughly $6 billion and is valued at approximately 83 times this year's expected earnings and 10.5 times adjusted sales. The company is facing resource-rich competitors in the cloud-infrastructure services industry, but the overall market is growing fast enough that the business could be able to establish a lasting foothold in the space. The stock still looks like a relatively high-risk investment despite trading down big from its high, but it could have explosive upside if DigitalOcean continues to attract new customers and is able to increase spending from those already using its services.
