Shares of cloud-computing company DigitalOcean (DOCN 3.30%) surged higher on Friday after the company reported financial results for the third quarter of 2023. It outperformed Wall Street's expectations, which is a big reason for the positive reaction from the market today. As of 10:50 a.m. ET, DigitalOcean stock was up 17%.

The business isn't falling apart

To put today's surge in perspective, investors need to understand that DigitalOcean stock was down 22% year to date and had hit its all-time low earlier this week. Shares had been crushed in August after the company reported second-quarter results and had steadily slid since.

In the third quarter, revenue was $177 million, which was ahead of management's guidance of $172.5 million to $174 million. The company's customer counts increased as well, as did its average revenue per user (ARPU), both of which were good.

The star of the third-quarter show, however, was free cash flow. Analysts had expected relatively weak results given the drag of its recent acquisition, Paperspace. However, Digital Ocean generated adjusted free cash flow of $56 million, which resulted in an impressive margin of 32%.

But there are things to watch with DigitalOcean

Management raised its full-year 2023 guidance in light of third-quarter results. Previously it had expected full-year revenue of $685 million at most; now it expects $690 million. Considering it outperformed by about $3 million in the third quarter, its guidance for the fourth quarter basically got a modest boost of about $2 million.

However, I'm not sure everything in this report was positive for DigitalOcean. It's guiding for fourth-quarter revenue of $178 million, which is only up $1 million from the third quarter. Moreover, its cash, cash equivalents, and marketable securities are $384 million, down from $864 million at the start of the year.

In other words, DigitalOcean's cash has dropped by $480 million even though it has generated $127 million in adjusted free cash flow. The company has made acquisitions, but growth is slowing nevertheless. And it has repurchased shares, but it expects its full-year weighted average share count to be at least 102 million, up from the start of the year.

Therefore, while the market was excited with DigitalOcean's third quarter, shareholders will need to monitor other key metrics like these in future quarters.