On Thursday, DigitalOcean Holdings Inc. (NYSE: NYSE:DOCN) received an upgraded stock rating from Morgan Stanley (NYSE:MS), moving from Equalweight to Overweight. The firm also adjusted the price target for DigitalOcean slightly upwards to $41.00 from the previous $40.00. The upgrade is a response to the company's successful expansion of product capabilities to meet the demands of larger customers. Currently trading at $34.24, InvestingPro analysis suggests the stock is slightly undervalued based on its proprietary Fair Value model.
DigitalOcean, known for its cloud computing platform catering to developers, has been strategically moving upmarket without losing focus on its core developer community. This shift towards serving its 'Scaler' customers, the larger clients, is expected to bring about faster growth and improved unit economics.
The company has demonstrated solid performance with a 12.08% revenue growth and an impressive 60.18% gross profit margin in the last twelve months. Morgan Stanley's analysis suggests that DigitalOcean's stock is currently undervalued, trading at only 0.56x enterprise value to gross profit (EV/GP/Growth), which is below the software industry average of 0.71x.
The valuation of DigitalOcean at approximately 16 times price to earnings (P/E) stands out as a significant discount when compared to the software industry's average P/E of 25 times. InvestingPro data shows the company maintains a perfect Piotroski Score of 9, indicating strong financial health, while its current P/E ratio stands at 37.84.
Morgan Stanley believes that the market has not yet fully appreciated DigitalOcean's ongoing business improvements and the potential of its developing artificial intelligence and machine learning (AI/ML) strategy. For detailed insights and access to 10+ additional ProTips, explore the comprehensive Pro Research Report available on InvestingPro.
According to Morgan Stanley, the market's current valuation does not reflect DigitalOcean's potential for growth and overlooks the company's efforts to enhance its core business. The firm sees an attractive risk/reward scenario for investors considering DigitalOcean's shares, given the company's strategic moves and the additional opportunities that its AI/ML initiatives may present.
The upgrade to Overweight is a positive signal for DigitalOcean, as it indicates a confidence from Morgan Stanley that the company's stock will perform well in the market, based on its current trajectory and initiatives.
In other recent news, DigitalOcean Holdings Inc. reported a 12% year-over-year revenue increase in its third quarter of 2024, with a significant contribution from its AI/ML platform that saw a nearly 200% rise in annual recurring revenue. The company has also revised its full-year revenue guidance upward and announced the launch of 42 new features. Despite facing challenges with its managed hosting service, Cloudways, DigitalOcean remains optimistic about future growth, especially in the area of AI capabilities.
Furthermore, DigitalOcean has introduced a new scalable storage feature for its Managed MongoDB (NASDAQ:MDB) service, offering users more flexibility and cost-efficiency in managing their data storage needs. This feature allows users to adjust their storage capacity separately, potentially reducing costs by avoiding unnecessary upgrades to processing power and memory.
The company's revenue guidance for Q4 2024 is set between $199 million to $201 million, with an expected full-year non-GAAP diluted earnings per share of $1.70 to $1.75. Looking ahead, management anticipates baseline growth in the low to mid-teens for 2025, backed by a commitment to operational leverage and product innovation. An Investor Day is also planned for late March or early Q2 2025 to discuss long-term strategies and financial outlook.
These recent developments indicate DigitalOcean's ongoing commitment to product innovation and operational leverage, particularly in the realm of AI capabilities. Despite certain challenges, the company's focus on larger customers and AI strategy, including the launch of NVIDIA (NASDAQ:NVDA) H100 Tensor Core GPU droplets and early access to a GenAI platform for select customers, is contributing significantly to revenue growth.
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