Stock Story -
What Happened: Shares of cloud computing provider DigitalOcean (NYSE: NYSE:DOCN) jumped 6.1% in the afternoon session after the major indices soared (Nasdaq up 3%, S&P up 2%) while yields declined after the Federal Open Market Committee kept interest rates unchanged at 5.25% to 5.50% following the July 2024 policy meeting.
However, a more important factor driving the rally is related to Fed Chair Jerome Powell's dovish comments, which revealed the committee's readiness to begin cutting rates as additional data confirms inflation is under control. The Fed Chair added, "If that test is met, a reduction in our policy rate could be on the table as soon as the next meeting in September."
As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. With lower interest rates, investors can apply higher valuations to their stocks.
We at StockStory remain cautious, as following the crowd can lead to adverse outcomes. During times like this, it's best to own high-quality, cash-flowing companies that can weather the ups and downs of the market. After the initial pop the shares cooled down to $33.24, up 4.5% from previous close.
Is now the time to buy DigitalOcean? Find out by reading the original article on StockStory, it's free.
What is the market telling us: DigitalOcean's shares are very volatile and over the last year have had 21 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The biggest move we wrote about over the last year was 5 months ago, when the stock gained 14.6% on the news that the company reported fourth quarter results and delivered very solid free cash flow. Its revenue narrowly outperformed Wall Street's estimates while EPS beat by a more convincing margin.
On the other hand, gross margin decreased. Looking ahead, revenue guidance for the next quarter and full year came in roughly in line with expectations. Having experienced macro challenges in 2023, management provided a more encouraging outlook on the business environment adding, "While top line pressure lasted longer into 2023 than we had originally expected, we saw a bottoming of the headwinds in Q3, and with stable net dollar retention and steady growth in Cloudways in the second half, we exceeded the revised full year revenue outlook."
Zooming out, this was still a decent, albeit mixed, quarter, showing that the company is staying on track.
DigitalOcean is down 8.3% since the beginning of the year, and at $33.24 per share it is trading 32.9% below its 52-week high of $49.52 from July 2023. Investors who bought $1,000 worth of DigitalOcean's shares at the IPO in March 2021 would now be looking at an investment worth $781.65.
