DigitalOcean Holdings (DOCN) Could Be 37% Undervalued On Raised Outlook And AI Growth
On August 4, DigitalOcean Holdings (DOCN) reported second quarter results that featured 29% year over year revenue growth and a higher full year outlook, which put fresh attention on its AI focused cloud platform.
DigitalOcean Holdings' share price has been volatile recently, with a 1-day share price return of 2.81% and a 7-day share price return of 1.61% following the earnings release. However, the stock is still down 9.41% over 30 days and 33.18% over 90 days, even as the year to date share price return of 129.67% and 1-year total shareholder return of 237.65% point to strong longer term momentum behind the AI focused cloud story.
Compare DigitalOcean Holdings' AI focused momentum with a curated set of 55 AI infrastructure stocks that are helping power the same shift toward inference and high intensity cloud workloads.
Bulls point to DigitalOcean Holdings' AI revenue surge and raised outlook. Bears point to the sharp pullback in the share price. Which side makes more sense once you line this story up against today’s valuation?
Most Popular Narrative: 37.1% Undervalued
DigitalOcean Holdings last closed at $112.47, while the most followed narrative places fair value closer to $178.77 using a 9.09% discount rate. That gap has caught attention after the latest AI and cloud updates.
Accelerating adoption among digital native enterprises and AI-native customers, coupled with robust product innovation (over 60 new products/features released in the quarter and strong uptake of recent releases by top customers), is expanding DigitalOcean's addressable market and driving higher incremental annual recurring revenue impacting future top-line revenue and customer retention.
Want to see what kind of revenue trajectory and profit profile could justify that higher fair value for DigitalOcean Holdings? The narrative leans on faster top line expansion, shifting margins and a future earnings multiple that is usually reserved for the most highly rated software stocks.
Result: Fair Value of $178.77 (UNDERVALUED)
Have a read of the narrative in full and understand what's behind the forecasts.
However, DigitalOcean Holdings still faces real pressure if AI infrastructure spending cools, or if larger cloud rivals draw away the higher value workloads this narrative depends on.
Find out about the key risks to this DigitalOcean Holdings narrative.
Another View: What DigitalOcean Holdings’ P/E Is Telling You
The popular AI narrative points to DigitalOcean Holdings as 37.1% undervalued. The P/E ratio tells a different story. At 56.2x earnings, the stock trades well above the US IT industry on 20.7x, the peer average on 40.8x, and a fair ratio of 22.3x that the market could eventually move toward. That kind of gap can work in investors’ favor if the story plays out perfectly or leave little cushion if expectations reset.
See what the numbers say about this price — find out in our valuation breakdown.
Next Steps
With DigitalOcean Holdings drawing both enthusiasm and concern, it helps to move quickly from headlines to hard data and form your own view. A good starting point is to line up the 4 key rewards and 4 important warning signs.
Looking for more investment ideas beyond DigitalOcean Holdings?
If you stop with DigitalOcean Holdings, you could miss other opportunities that fit your style even better. Keep building your shortlist with a few focused screens.
- Target potential mispricings by scanning a curated set of 47 high quality undervalued stocks that combine quality fundamentals with more modest expectations.
- Build a steadier income stream by reviewing 11 dividend fortresses and see which companies match your preferred yield and payout profile.
- Prioritise resilience by checking out a 80 resilient stocks with low risk scores that highlights stocks with stronger balance sheets and less volatile risk scores.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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