More often than not, a steep decline in a company's share price points to structural problems with its business that might be difficult to overcome. Then there are those occasions where a stock price drop has less to do with the company and more to do with outside forces it has no control over.
The last few years have been jam-packed with distortions in the financial markets. Investors navigated the pandemic and a flood of U.S. government stimulus followed by 40-year highs in inflation and the most aggressive campaign to hike interest rates in the U.S. Federal Reserve's history. As a result, many individual stocks were swept up in a buying frenzy throughout 2020 and 2021, followed by a crash back to Earth in 2022.
Some of these stocks are still trading down heavily today, despite being underpinned by relatively strong businesses. For instance, shares of DigitalOcean (DOCN -1.76%) and Snap (SNAP 2.89%) trade about 67% and 87%, respectively, below their all-time highs. Here's why that presents a major buying opportunity for investors.
1. DigitalOcean: The little cloud stock that could
Cloud computing is an incredibly important technology to most businesses because it allows them to store data online, host their website, or even develop games and mobile applications. The cloud industry is dominated by three main providers: Amazon Web Services (AWS), Microsoft Azure, and Alphabet's Google Cloud.
Each of those platforms is backed by its trillion-dollar parent company. DigitalOcean, however, is a rapidly growing, stand-alone cloud provider that's taking the fight to all of them. It focuses on providing cloud services exclusively to small and mid-sized businesses with under 500 employees. It differentiates itself from its competitors by offering cheap and transparent pricing, a simple platform with one-click deployment tools, and highly personalized service to help them get the most from their cloud experience.
The industry leaders are focused on attracting large enterprise customers, so they often won't go the extra mile for small businesses the way DigitalOcean does. Its platform now serves 614,000 customers, with 468,000 of them spending just $15 per month -- in other words, DigitalOcean is a great on-ramp into the cloud for start-ups.
It relies on some of those small enterprises eventually becoming "scalers," which grow significantly and deploy much larger budgets. DigitalOcean had 15,000 of those customers as of the first quarter of 2023 (ended March 31), and their average monthly spending was $1,962.
DigitalOcean generated $165.1 million in revenue during Q1, an increase of 30% year over year. By comparison, AWS grew its revenue by 16%, Azure by 27%, and Google Cloud by 28%, so DigitalOcean had them all beat.
The company estimates its addressable market will be worth $98 billion in 2023 and that it could double to $195 billion by 2026. Judging by its current revenue, DigitalOcean has only scratched the surface of its opportunity so far, and since its stock trades down 67% from its all-time high amid the brutal sell-off in the tech sector last year, this might be a great opportunity for investors to buy in.
2. Snap: A growing user base bodes well for the long term
Snap is the parent company of popular social media platform Snapchat. Its stock is down 87% from its all-time high as rising inflation and interest rates put the brakes on the economy over the last 18 months. It forced businesses to cut back on their advertising budgets, and Snap earns nearly all of its revenue from selling digital ads on its platform.
Despite the recent turmoil, the company spent this period investing in improving its platform for both users and advertisers. It recently released a new artificial intelligence (AI)-powered feature called My AI, which serves as a personal chatbot for its users. It's built on OpenAI's ChatGPT platform, and it's capable of answering complex questions and suggesting gift ideas or even restaurants for users to enjoy with friends.
On the advertising side, Snap continues to develop its augmented reality (AR) platform, which has been extremely powerful for businesses in the retail space. An advertiser can use Snap's AR Lenses to offer virtual try-on experiences to users, so they can gain a realistic sense of what they'd look like in an item of clothing or an accessory like sunglasses. Eyewear retailer Goodr has been testing AR-based ads, and they have resulted in a 67% increase in conversions and a 59% increase in revenue per shopper. Plus, users were 81% more likely to "add to cart" after seeing an AR ad.
Snap is making it easier than ever for businesses to advertise using AR. Now, they can simply upload a photo of a product, and Snap's technology will create the Lens for them automatically.
These initiatives will take time to filter through to Snap's financials. Its revenue sank 7% in the first quarter of 2023 to $989 million as the broader economy continued to weigh on the business's marketing budgets. But here's the good news: Snap's user base continues to grow, reaching an all-time high of 383 million daily active users in Q1.
Once the economy improves -- and it will -- Snap's going to have a larger user base than ever to monetize. And with the sheer improvement in advertising metrics thanks to AR, it could find itself attracting more businesses to its platform, too. That's a recipe for a rebound in its revenue growth in the medium to long term.
