The stock market took a dive on Thursday after the Federal Reserve raised interest rates and retail sales figures missed expectations. Recession fears are ramping up, and even the prospect of a shift to smaller rate hikes wasn't enough to quell those concerns.
There's no telling what the stock market is going to do as 2022 comes to a close. Regardless, it's always a good idea for investors to have a watchlist of stocks that they're interested in buying at lower prices ready to go, because those lower prices can come at any time. For me, I'm keeping an eye on DigitalOcean (DOCN 1.78%) and Micron Technology (MU 4.73%).
DigitalOcean
Shares of cloud computing provider DigitalOcean have always been a little too expensive for me to seriously consider. There's a lot to like about the company, but there are significant risks as well.
DigitalOcean has positioned itself as the cloud platform for developers and small businesses that don't want to deal with the immense complexity that comes with Amazon Web Services. Spinning up a virtual server is dead simple, and pricing is transparent and predictable. While the narrowness of DigitalOcean's platform means it will struggle to win over large enterprise customers, the company still has an enormous market opportunity. DigitalOcean estimates that its total addressable market will reach $144.6 billion by 2025.
DigitalOcean's customer acquisition strategy revolves around content. The company publishes a wealth of helpful articles, tutorials, and guides, and it expanded its portfolio earlier this year by acquiring website CSS-Tricks. Millions of visitors are finding DigitalOcean's content each month, and each is a potential customer. This low-cost acquisition channel is critical to the company's plan to produce sustainable, consistent, and growing free cash flow.
DigitalOcean grew revenue by 37% year over year in the third quarter, and the company is aiming to grow by at least 30% annually for the foreseeable future. With annual revenue expected to be under $600 million this year, DigitalOcean is still at the early stages of tapping into its market opportunity. If the company succeeds in growing by 30% annually, revenue will top $8 billion in a decade and the current market capitalization of $2.7 billion will look like a steal in retrospect.
There are some big risks that could derail DigitalOcean's growth story. The one I'm worried about the most is competition. DigitalOcean is far from the only company focused on delivering the simplest cloud experience possible. There are similar platforms competing for the same customers, as well as myriad platform-as-a-service providers that take simplicity to the next level. DigitalOcean will have a fight on its hands as it tries to hit its growth targets in the coming years.
While DigitalOcean has a compelling growth story, it's far from a slam dunk. Given the risks, I'll want a lower price before putting the stock in my portfolio.
Micron Technology
Micron manufactures DRAM and NAND memory chips. These chips are largely commodities, so prices can make big swings up and down based on supply and demand. Following a pandemic-era boom that produced hefty profits for Micron, the pendulum has now swung in the opposite direction. Micron's revenue is crashing, and profits are set to evaporate.
Valuing Micron based on earnings or sales is difficult because it matters at what point in the cycle you're looking at. If you calculated a price-to-earnings ratio last year when Micron was riding high, you would have concluded that the stock was impossibly cheap. If you did the same today, with profits tumbling, you would run away in terror.
Because Micron is a capital-intensive manufacturer, looking at how the price-to-tangible-book value ratio compares to historical levels is a good way to get a sense of how cheap or expensive Micron stock really is. Here's how that looks:
MU Price to Tangible Book Value data by YCharts
Micron stock isn't quite as cheap as it's been at times over the past decade, but it's getting there. What's holding me up is the concern that this cycle is going to be worse than previous cycles. A recession is a possibility next year, inflation is putting pressure on consumers and businesses, demand for PCs is crashing-- there's a lot going wrong all at once. This could be the kind of cycle where Micron ends up burning through cash for an extended period.
At the right price, Micron can be a great long-term investment. But I think the right price is a bit lower than where Micron stock trades today.
