What happened
Shares of cloud-computing company DigitalOcean (DOCN 8.53%) dropped 19.5% in April, according to data provided by S&P Global Market Intelligence. This was a punctuated drop considering the S&P 500 was up 1.6% for the month. And it appears the drop is related to negative analyst sentiment and the recently reported financial results of the cloud titans.
So what
DigitalOcean reported financial results for 2022 on Feb. 16. And it will report financial results for the first quarter of 2023 on May 9. Therefore, the stock's underperformance was not the result of poor financial results -- no financials were reported in April.
Since the problem wasn't with DigitalOcean, investors should look elsewhere to explain the nearly 20% drop. And looking at the cloud-computing titans -- Alphabet, Microsoft, and Amazon -- is a good place to start. All three reported financial results in April.
When Microsoft talked about its cloud-computing product Azure, management said, "Customers continue to exercise some caution." Talking about its cloud platform, Alphabet's management said, "We continued to see slower growth of consumption." Finally, regarding Amazon Web Services (AWS), Amazon's management said, "Customers continue to evaluate ways to optimize their cloud spending in response to these tough economic conditions in the first quarter."
In other words, macroeconomic conditions are negatively impacting spend for cloud-computing services with the big three in cloud computing, which points to tough conditions for smaller DigitalOcean as well.
This was on the mind of Needham analyst Mike Cikos when he downgraded DigitalOcean stock on April 25. According to The Fly, Cikos is concerned that demand for cloud computing is falling due to the economy. And Cikos is also concerned that DigitalOcean will be particularly hard-hit due to its exposure to small and medium-sized businesses, which could be under more pressure in a slowing economy.
The financial reports of the tech giants and the negative analyst commentary led to the drop in DigitalOcean stock in April.
Now what
As mentioned, DigitalOcean will report Q1 financial results next week. At the midpoint of guidance, management expects Q1 revenue of $164 million, which would represent healthy 29% year-over-year growth. For the year, management only expects 23% revenue growth at the midpoint of guidance. Therefore, it's important for 2023 to start strong, considering guidance implies a slowdown later in the year.
To be fair, DigitalOcean management has already talked about the slowdown in the cloud space, and it's a big reason the stock is down 76% from its all-time high. For example, in the conference call to discuss Q4 results, CEO Yancey Spruill said, "We saw continued slower growth in our existing customer cohorts and new customer acquisition, and that has continued into 2023." Moreover, this dynamic motivated management to push its $1 billion revenue goal from 2024 to 2025.
Therefore, the near-term slowdown in cloud spend is a known factor with DigitalOcean. However, assuming the long-term opportunity is intact, the stock could offer exceptional value and make it a stock worth buying right now, in my opinion.