DigitalOcean (DOCN 3.30%) was one of a few high-flying tech companies to recently receive a dubious honor: a stock crash of more than 20% following its second-quarter earnings announcement. To be fair, a number of items conspired against the cloud service provider this quarter, and investors aren't wrong to turn a skeptical eye toward the company after what had been a near-doubling in stock price so far in 2023.

But for those who were looking for the right time to get in, is this the opportunity to scoop up DigitalOcean stock you were waiting for? 

Q2 wasn't the problem

Let's start with the good stuff. DigitalOcean reported year-over-year revenue growth of 27% to $170 million in the second quarter. The company's adjusted free cash flow came in at $45 million, a 27% profit margin, and above the full-year 2023 target of 21% to 22% for adjusted free-cash-flow margin.  

The company is using its quickly increasing profitability to provide returns to shareholders. Stock repurchases through the first half of the year now total $369 million, or 11% of the current market cap. Huzzah!

Growing pains for a small business

Some investors point out that DigitalOcean's cloud infrastructure competes with heavyweights like Amazon's AWS and Microsoft's Azure, which would pose a threat to this tiny business if they ever decided they really wanted to go after the small-business and start-up demographic that DigitalOcean serves.

That hasn't come to pass over the last couple of years, but this company isn't immune to problems. CEO Yancey Spruill explained on the earnings call that macroeconomic concerns continue to have an impact on DigitalOcean's customers, and the deceleration in revenue growth is thus not yet complete. As a result, Spruill and company has reduced its full-year revenue guidance to a range of $680 million to $685 million (versus $700 million to $720 million previously).

The good news is that its adjusted free-cash-flow margin is still expected to be 21% to 22% -- but with revenue lowered, that will equate to less cash inflow.  

Additionally, new tax compliance leadership is in place at DigitalOcean, and some accounting errors were found, which is going to lead to the restatement of some past results. That's not good either. CFO Matt Steinfort said on the earnings call:

The error had an immaterial impact on our full-year 2022 financials, but did have a material impact on our reported Q1 2023 financials and rose to the level of a material weakness in both periods. The correction of the roughly $18 million overstatement of Q1 tax expense will result in lower net loss and higher non-GAAP earnings per share in Q1 of 2023, and will result in a lower net operating loss balance as of December 31, 2022.

While this discovery will lead to an increase in adjusted earnings, it doesn't exactly spell confidence in internal accounting controls. At least, it seems the deficiencies have been uncovered and addressed, and steps taken to prevent similar issues in the future. 

Time to buy the dip?

With the risks in mind, I'm a buyer of DigitalOcean on this dip. The company continues to hold its own in the cloud infrastructure market. And in addition to being self-sufficient, with cash-generating operations that enable it to repurchase stock, the company recently announced a noteworthy acquisition of artificial intelligence infrastructure start-up Paperspace. This could help fuel new growth later on, as many small-business customers have expressed interest in Nvidia's GPU-powered services on the DO platform in recent years. 

At the midpoint of guidance, DigitalOcean stock trades for 22 times expected full-year free cash flow. I believe this small-cap cloud stock still has a lot of long-term potential, and the near-term problems are being intensely focused on, so I plan on adding to my position.