Insights

Here’s Why DigitalOcean Stock Plunged 32% in April

What happened
Shares of cloud company DigitalOcean (NYSE: DOCN) plunged 31.8% in April, according to data provided by S&P Global Market Intelligence. This significantly underperformed the market average but it apparently didn’t fall far enough given its performance so far in May. As of this writing on May 5, DigitalOcean stock has fallen an additional 10% after disappointing investors with its financial results for the first quarter of 2022. 
With its dreadful performance in April and May, DigitalOcean stock now sits more than 70% down from its all-time high in 2021.

April returns for DigitalOcean stock compared to the S&P 500. ^SPX data by YCharts
So what
DigitalOcean provides cloud services to small and medium-sized businesses. And to be clear, April was a sleepy month for business; the company didn’t report any new information. One of the only things that did happen was KeyBanc Capital Markets analyst Michael Turits lowered his price target for the stock on April 25 from $69 per share to $54 per share, according to The Fly. The only other major news from an analyst came from Piper Sandler’s James Fish, who gave it a buy rating and a price target of $72 per share, offsetting Turits’ downgrade.
Image source: Getty Images.

Therefore, April was a quiet month for DigitalOcean despite what the stock price would have you think. But for context, many unprofitable companies like DigitalOcean sold off by a similar amount — it seems unprofitable growth stories are currently out of fashion. This is probably the biggest reason DigitalOcean stock was down in April.
But May is a different story. DigitalOcean reported first-quarter results on May 4 and the market wasn’t impressed. Revenue came in about as expected, but the company missed expectations on the bottom line. Moreover, management gave guidance for the second quarter that shows single-digit growth from Q1. Many labeled this guidance as “weak” and the stock fell as a result.
Now what
DigitalOcean’s management didn’t only provide Q2 guidance. It also maintained its full-year 2022 guidance. For the year, it expects to generate revenue of $564 million to $568 million. At the midpoint, this represents year-over-year growth of 32%. And it expects a free-cash-flow margin of 8% to 10% — a substantial improvement from its 6% margin in 2021.
This revenue growth and margin improvement should be encouraging for DigitalOcean shareholders. Moreover, the company made progress in other key areas as well in Q1. It ended Q1 with 623,000 customers — up 6% year over year and up 2.3% from the previous quarter. This sequential growth reverses some recent attrition, which was important to see. Average revenue per customer also increased 28% year over year.
One thing to watch is stock-based compensation. DigitalOcean’s management repurchased 2.6 million shares in Q1 but its total share count is expected to rise for the year nevertheless. In short, this may not be the best use of cash for a small company competing with larger players.
Jon Quast has positions in DigitalOcean Holdings, Inc. The Motley Fool has positions in and recommends DigitalOcean Holdings, Inc. The Motley Fool has a disclosure policy. –

What happened

Shares of cloud company DigitalOcean (NYSE: DOCN) plunged 31.8% in April, according to data provided by S&P Global Market Intelligence. This significantly underperformed the market average but it apparently didn’t fall far enough given its performance so far in May. As of this writing on May 5, DigitalOcean stock has fallen an additional 10% after disappointing investors with its financial results for the first quarter of 2022. 

With its dreadful performance in April and May, DigitalOcean stock now sits more than 70% down from its all-time high in 2021.

April returns for DigitalOcean stock compared to the S&P 500. ^SPX data by YCharts

So what

DigitalOcean provides cloud services to small and medium-sized businesses. And to be clear, April was a sleepy month for business; the company didn’t report any new information. One of the only things that did happen was KeyBanc Capital Markets analyst Michael Turits lowered his price target for the stock on April 25 from $69 per share to $54 per share, according to The Fly. The only other major news from an analyst came from Piper Sandler‘s James Fish, who gave it a buy rating and a price target of $72 per share, offsetting Turits’ downgrade.

Image source: Getty Images.

Therefore, April was a quiet month for DigitalOcean despite what the stock price would have you think. But for context, many unprofitable companies like DigitalOcean sold off by a similar amount — it seems unprofitable growth stories are currently out of fashion. This is probably the biggest reason DigitalOcean stock was down in April.

But May is a different story. DigitalOcean reported first-quarter results on May 4 and the market wasn’t impressed. Revenue came in about as expected, but the company missed expectations on the bottom line. Moreover, management gave guidance for the second quarter that shows single-digit growth from Q1. Many labeled this guidance as “weak” and the stock fell as a result.

Now what

DigitalOcean’s management didn’t only provide Q2 guidance. It also maintained its full-year 2022 guidance. For the year, it expects to generate revenue of $564 million to $568 million. At the midpoint, this represents year-over-year growth of 32%. And it expects a free-cash-flow margin of 8% to 10% — a substantial improvement from its 6% margin in 2021.

This revenue growth and margin improvement should be encouraging for DigitalOcean shareholders. Moreover, the company made progress in other key areas as well in Q1. It ended Q1 with 623,000 customers — up 6% year over year and up 2.3% from the previous quarter. This sequential growth reverses some recent attrition, which was important to see. Average revenue per customer also increased 28% year over year.

One thing to watch is stock-based compensation. DigitalOcean’s management repurchased 2.6 million shares in Q1 but its total share count is expected to rise for the year nevertheless. In short, this may not be the best use of cash for a small company competing with larger players.

Jon Quast has positions in DigitalOcean Holdings, Inc. The Motley Fool has positions in and recommends DigitalOcean Holdings, Inc. The Motley Fool has a disclosure policy.

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