On Monday, BofA Securities updated its stance on DigitalOcean (NYSE:DOCN), a cloud infrastructure provider, by raising its price target to $28 from $25. The firm, however, has maintained an Underperform rating on the company's shares.
DigitalOcean reported its third fiscal quarter of 2024 revenue, which showed a year-over-year increase of 12% at $198 million. The company's earnings per share (EPS) stood at $0.52, and its adjusted EBITDA was $87 million, representing an adjusted EBITDA margin of 44%. These figures surpassed the higher end of the company's previous guidance.
The net dollar retention (NDR) rate for DigitalOcean remained steady sequentially at 97%, attributed to an increase in product velocity. During the third fiscal quarter, the average revenue per user (ARPU) rose by 11% year-over-year to $102.52, as the company continues to shift its revenue mix towards customers who spend more and are expected to grow faster.
Despite favorable developments such as customer wins over cloud competitors and the securing of multi-year contracts, BofA Securities reiterated its Underperform rating on DigitalOcean. The firm noted that while these factors are positive, they do not yet indicate a clear path towards significant revenue growth. The firm also pointed out that while there are expectations for revenue acceleration in early 2025, the NDR is not projected to inflect at the start of that year.
DigitalOcean's gross margin (GM) for the third fiscal quarter was reported at 62%, a slight decrease of 70 basis points from the previous year. This change was attributed to ongoing cost optimization efforts, which have been balancing out continued investments in artificial intelligence (AI).
In other recent news, DigitalOcean has reported significant growth in its second quarter results, with a 13% increase in revenue year-over-year, totaling $192.5 million. The company's artificial intelligence (AI) and machine learning products have seen an impressive 200% growth in annual recurring revenue. Additionally, DigitalOcean has launched a new range of advanced AI infrastructure solutions, including pay-as-you-go GPU Droplets and expanded Kubernetes support.
Canaccord Genuity has maintained its Buy rating on DigitalOcean and increased the price target to $48.00, highlighting the company's potential for growth. Piper Sandler, on the other hand, maintained a Neutral rating, awaiting further evidence of sustained demand and clearer visibility on free cash flow.
Goldman Sachs (NYSE:GS) reaffirmed its Buy rating, stating that the company's AI investments could enhance the company's organic revenue growth by 4-6 percentage points annually over the next three years.
InvestingPro Insights
To enrich the analysis of DigitalOcean (NYSE:DOCN), let's consider some additional financial metrics and insights from InvestingPro. Despite BofA Securities' Underperform rating, DigitalOcean has shown strong performance in certain areas. The company's revenue for the last twelve months as of Q2 2024 stood at $735.14 million, with a growth rate of 13.09%. This aligns with the article's mention of the 12% year-over-year revenue increase in Q3.
An InvestingPro Tip highlights that DigitalOcean's net income is expected to grow this year, which could be a positive sign for investors despite the cautious outlook from BofA Securities. Additionally, the company's P/E ratio of 47.02 suggests that while it may be trading at a high earnings multiple, it's also trading at a low P/E ratio relative to its near-term earnings growth potential, as indicated by another InvestingPro Tip.
It's worth noting that DigitalOcean has been profitable over the last twelve months, with a basic EPS from continuing operations of $0.76. This profitability, combined with the company's strong return over the last three months (42.31% price total return), may explain why some investors remain optimistic about its prospects.
For readers interested in a more comprehensive analysis, InvestingPro offers 12 additional tips for DigitalOcean, providing a deeper understanding of the company's financial health and market position.
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