DigitalOcean (NASDAQ:DOCN) stock is a growth name in a time of value. DigitalOcean nearly matched its 2020 revenue in the first three quarters of 2021. Its losses are narrowing and operating cash flow has skyrocketed. There’s nothing wrong with the cloud hosting company’s operations.
What’s wrong is its valuation in the eyes of the market. Even after dropping 28% in less than a month, DigitalOcean’s market capitalization of $8.06 billion is still over 20 times expected 2021 revenue. The value of growth has a limit. What you need to answer today is where the limit lies.
What’s in the Ocean?
DigitalOcean was founded 10 years ago to serve software developers with cloud hosting that explicitly supported open source.
Co-founders Ben and Moisey Uretsky saw a niche, Andreesen Horowitz led the funding, and the company’s March IPO was a huge success. Investors who bought at $41 on March 26 had stock worth over $120/share by November. Even with the stock’s recent fall, those investors have doubled their money.
DigitalOcean now has a global network of 8 data centers, all in major computing hubs like Frankfurt in Germany, Bangalore in India, New York, and San Francisco. While it has its own technical terms (virtual machines are called “droplets”), it sells itself as being easier to use than giant competitors like Amazon.Com’s (NASDAQ:AMZN) Amazon Web Services.
Analysts love DigitalOcean. It’s growing 25%, its prospects are excellent, and profits are on the horizon.
Name Your Price
Unfortunately for investors, the market has decided that there’s a limit to growth’s value. As 2021 turns into 2022, investors want “real” things. They want value stocks. If interest rates are rising, if money costs money, only real gains will make up for inflation, goes the thinking.
This is not just a problem for DigitalOcean. Technology in general has fallen out of favor. Companies like Crowdstrike (NASDAQ:CRWD), Asana (NYSE:ASAN), and Palantir (NYSE:PLTR) have all been falling in price, with buyers ignoring calls to “buy the dip” or pick up a “bargain.”
However, you can claim that DigitalOcean will grow five-fold by 2030, and it might. But what’s the value of that growth? Is it 30 times current revenue? Is it 20 times revenue, which is the present valuation? Is it lower?
Moreover, there are also hard questions for customers to answer. At a market cap of $8.06 billion, DigitalOcean is vulnerable to takeover. If DigitalOcean does get a buyout offer, will it come from a company that’s equally friendly to open source? You don’t want to move operations away from the big, bad wolf only to have the wolf buy your new home.
Officially, analysts have yet to give up on DigitalOcean, with 8 of 10 at Tipranks having it on their buy lists. Unofficially all the technical indicators on the stock are down.
This leaves investors looking for the bounce. It may have come on Dec. 6, when shares hit a low of $84. But another wave of tech selling on December 15 had DOCN stock opening at about $73.08, a lower low.
The Bottom Line
Dips pass and fashions change. If you buy DigitalOcean today, you might be in the red tomorrow. But will you still be in the red a year from now?
Over the long term, tech is the best hedge you can have against inflation. Tech investments lower the cost of doing business. They replace people with software. They create productivity, efficiency, and deflation.
If you’re worried about next month, you can wait for analysts to grow bearish and for DigitalOcean to go lower. If your concern is 2026, DOCN Stock is a buy here.
On the date of publication, Dana Blankenhorn held a long position in AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. Just in time for the holidays he has a collection of COVID-19 stories at the Amazon Kindle store. Write him at [email protected] or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.