Shares of DigitalOcean (DOCN 1.44%) were pulled under this week, falling as much as 26.2%. As of market close on Thursday, the stock was still down 25.5%.
The catalyst that sent the cloud computing specialist lower was increasingly bearish analyst sentiment, as evidenced by multiple downgrades and lower price-target revisions.
First up this week was Morgan Stanley analyst Josh Baer, who downgraded DigitalOcean to underweight (sell) from equal weight (hold), according to The Fly. Baer also poured salt on the wound by lowering the stock's price target to $45, down from $61, which was below the stock's closing price last week. Baer cited evidence of a slowdown in software spending and DigitalOcean's dependence on small businesses, which will likely suffer more if the specter of recession becomes a reality.
To add insult to injury, Goldman Sachs analyst Gabriela Borges issued a rare double downgrade, lowering DigitalOcean stock from buy to sell, while lowering her price target to $40, down from $54. Borges argued that recent data suggests that companies will rein in spending over the coming year, weighing on DigitalOcean's results.
Given the company's consumption-based pricing, it would be relatively easy for thrifty customers to tighten their belts at DigitalOcean's expense.
These analysts have a point, but for investors with long-term outlooks, DigitalOcean remains a buy. Last year, revenue grew 35% year over year, accelerating from 25% growth in 2020. Additionally, existing customers were spending more, as evidenced by a 25% increase of average revenue per user (ARPU). Also, its net dollar retention rate -- which measures changes in existing customer spending -- clocked in at 113%.
Results in the first quarter were equally robust, with revenue up 36% year over year. At the same time, DigitalOcean's ARPU and net dollar retention rate came in at 28% and 117%, respectively, accelerating from last-year's impressive results. While profits remain elusive, positive cash flow suggests non-cash items like depreciation are responsible for the losses.
Perhaps as importantly, management's outlook suggests full-year revenue will grow at 32% at the midpoint of its guidance. Additionally, its market opportunity is expected to double by 2025, giving DigitalOcean investors plenty of reasons to buy.