What happened
Shares of cloud computing company DigitalOcean Holdings (DOCN +2.22%) were up 23.9% in May, according to data provided by S&P Global Market Intelligence. Early in the month the stock was down nearly 20% and it was during this time it reported financial results for the first quarter of 2022. Later in the month as the stock was recovering, management announced a share buyback program that may have further boosted investor confidence.
NYSE: DOCN
Key Data Points
So what
Unlike the large public cloud providers, DigitalOcean focuses on serving small and medium-sized businesses. On May 4, the company reported Q1 revenue of $127.3 million, which was more than its previous guidance of between $126 million and $126.5 million. However, management didn't raise its full-year revenue guidance range of $564 million to $568 million. And not raising the forecast for the year wasn't well received by investors.
Moreover, DigitalOcean's profit came up short of Wall Street's expectations. Consider that the company's gross profit margin made significant progress in Q1, jumping from 57.8% last year to 63.3% this year. And yet, its overall profitability declined because operating expenses soared 84% year over year, compared to just 36% year-over-year revenue growth.
Image source: Getty Images.
Many analysts lowered their price targets on DigitalOcean stock following the Q1 report, with some citing this profitability issue. However, the analyst community started reconsidering after a little time had passed. On May 12, Goldman Sachs analyst Gabriela Borges initiated coverage on DigitalOcean stock and gave it a buy rating that implied 59% upside, according to The Fly.
The vote of confidence from Borges likely went a long way in helping DigitalOcean stock rebound from its lows. But DigitalOcean's management contributed to the rebound as well. It had already authorized a $300 million share-buyback program in February and had already used half of it to repurchase shares. However, on May 24, it announced it was authorizing another $300 million in addition to the roughly $150 million it had remaining on the previous program.
In other words, DigitalOcean stock is still down more than 60% from its all-time high. And it appears management believes it's undervalued and is aggressively buying shares.
Now what
Things are going well for DigitalOcean right now. In Q1, its total customer count grew 6% year over year to 623,000. And existing customers are spending more over time, as measured by its net dollar retention rate of 117%. But on June 9, investors will get a front-row seat to hear management's thoughts on how well positioned the company is for the future. That's when it's scheduled an investor-day presentation.
Expect the presentation to be upbeat -- after all, DigitalOcean management does want investors to have a positive outlook. So take things with a grain of salt. However, these presentations can be a great way for shareholders to understand the long-term vision of the company. And having expectations grounded in the long term is always a good thing, in my opinion.
