What happened
Shares of cloud-computing company DigitalOcean Holdings (DOCN 3.30%) were up 22.5% in March, according to data provided by S&P Global Market Intelligence. There were analysts who downgraded their outlooks for DigitalOcean stock. But even still, someone was buying a lot of DigitalOcean stock during March.
So what
We'll start with the analyst commentary because that came first. On March 17, Timothy Horan of Oppenheimer downgraded DigitalOcean stock, essentially saying he expects it to be an average performer, according to The Fly. Specifically, the analyst doubts the company's forecasted growth rate due to challenges with the economy.
Five days later, Needham analyst Mike Cikos lowered his price target for DigitalOcean stock by 4% to $43 per share. Like Horan, Cikos cited economic uncertainty as a reason for the lower price target.
To be clear, this analyst commentary was shrugged off by the market. March was a strong month, with the S&P 500 up 3.5%. Likewise, DigitalOcean stock was up around 10% despite the downgrades from Wall Street. But the stock got a larger boost later in the month when the company reaffirmed its guidance and disclosed large share repurchases.
DigitalOcean reported financial results for 2022 on Feb. 16. At that time, it announced it was authorized to use $500 million to buy back stock. Management said it expected to use at least $230 million in 2023. But as it turns out, management has already used $273.5 million, as of March 30.
With this surprise update, DigitalOcean management disclosed that there are now around 89.7 million shares of the company outstanding. For perspective, that's about an 8% reduction in the share count -- greater than its 5% reduction of the share count in 2022.
One way to increase shareholder value is to reduce the outstanding share count. That's what DigitalOcean has been doing aggressively lately. And it's a big reason the stock was up in March.
DOCN Average Diluted Shares Outstanding (Quarterly) data by YCharts
Now what
While analysts have their doubts about revenue growth, DigitalOcean's management reaffirmed its revenue guidance for the first quarter of 2023. It's calling for $163 million to $165 million, which is about 29% year-over-year growth.
There is one final thing to be aware of: When the company reaffirmed guidance and updated investors regarding the share repurchase plan, DigitalOcean's management additionally disclosed that it dismissed its independent accounting firm Ernst & Young LLP on March 27 and immediately replaced it with PwC LLP.
DigitalOcean was clear that the change wasn't due to disagreements or adverse opinions. Moreover, the change likely means nothing -- Ernst & Young and PwC are both part of the "big four" accounting firms. So it's not like the company is swapping out a reputable firm for a ragtag outfit.
I don't believe the change in accountants is anything that should overshadow the favorable news with DigitalOcean. Revenue is growing, margins are expanding, and management is buying back stock -- all things that could lead to market-beating returns going forward.
