Why Citron’s DigitalOcean Verdict Is Justified

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imageStock Markets57 minutes ago (Sep 22, 2021 08:30PM ET)

(C) Reuters. Why Citron’s DigitalOcean Verdict Is Justified

DigitalOcean Holdings (DOCN) operates a cloud computing platform that provides developers with the necessary tools at an affordable rate.

The company is thought of by many as the Shopify (NYSE:SHOP) for cloud developers. I’m bullish on the stock. (See DOCN stock charts on TipRanks)

Citron’s Prediction

Andrew Left’s Citron Research recently placed a $200 price target on DigitalOcean stock, citing Shopify’s journey to the thousands club as one having similar parallels.

Earnings & Growth

Since Citron’s report was released, DigitalOcean managed to beat earnings, posting revenue of $103.8 million and a loss per share of $0.02 (beating estimates by three cents) in its second quarter.

Highlights from the company’s second quarter include a run rate increase of 36% year-over-year, net dollar retention rate year-over-year growth of 113%, and a quarter-over-quarter average spend per customer increase of 25%.

A month after DigitalOcean released its earnings, its acquisition of Nimbella was announced. Nimbella is a server-less cloud platform that helps organizations develop and execute a cloud strategy.

Although the deal’s financial details weren’t disclosed, it’s anticipated that Nimbella will add to top-line growth. Analysts expect DigitalOcean’s revenue to grow an additional 105.9% by December 2022.

Putting It Together

It’s one thing to look at activist investors’ opinions, and earnings growth, but it’s another to know whether the stock is fairly priced.

The company’s weighted cost of capital is respectable at 7.3%, while its free cash flow yield has increased by 69% since July. If these metrics continue to build on their solid trajectories, investors will certainly get value for their dollar.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, DigitalOcean comes in as a Moderate Buy, based on five Buys, and two holds. The average DOCN price target of $68.29 represents 19.7% downside potential, but this is because analysts haven’t covered the stock much of late.

The only analyst to have covered the stock within the past two months is Raimo Lenschow of Barclays (LON:BARC), who placed a bullish price target of $95 on the stock.

DigitalOcean should get more traction from analysts real soon. It’s a diamond in the rough, and fills a critical gap in the cloud development space.

Furthermore, metrics are aligned for future upside, and operating growth is facilitating improvements in top-line revenue. DigitalOcean remains speculative, but it could be a multi-bagger for those willing to take the risk.

Disclosure: At the time of publication, Steve Gray Booyens had a long position in DOCN.

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Why Citron’s DigitalOcean Verdict Is Justified

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