DigitalOcean (NYSE:DOCN) has run into the proverbial brick wall with shares falling by more than 25% over the last 90 days. Perhaps surprisingly, the share price tumble has taken place against a backdrop of earnings and revenue growth.
Will DigitalOcean bounce back, and is now the time to buy DOCN while the shares are still trading lower?
What’s Driving DOCN Down?
Unlike many stocks at the moment, DigitalOcean’s march lower can’t be primarily attributed to the threat of tariffs or big picture fears. Although DOCN shares did move lower with the rest of the market in early April when the Trump administration’s reciprocal tariff plan was announced, shares of DigitalOcean had already been falling since late February.
DOCN’s sharp selloff started with its Q4 earnings report, which underscored the company’s low revenue retention rate and gross margins. Both of these factors could be quite negative for investors, as DigitalOcean is disproportionately reliant on adding new customers in order to keep its revenues growing.
Of course, the market’s general selloff and expectations of weaker economic conditions ahead have also affected DigitalOcean. With businesses potentially reducing spending on new tech tools in response to declining consumer demand, companies like DigitalOcean could be in for short-term challenges. The long-term growth of cloud computing, however, doesn’t seem to be in question.
Is There a Chance for DOCN to Recover?
Although the stock has fallen off quite a bit since the beginning of the year, there are still some fairly positive trends in DigitalOcean’s business. To begin with, even the Q4 report that sent shares tumbling actually had its fair share of bright spots. Full-year revenues rose 13% to $781 million, and the company’s net income for 2024 skyrocketed by 335% to $84 million.
The Q1 report for 2025 showed similar trends, though shares once again fell after it came out. In Q1, quarterly revenues increased 14% year-over-year to $211 million, while net income rose 170% compared to the previous year to $38 million. Annual run-rate revenue also rose 14% to $843 million, up from $820 million at the end of Q4.
Another basically positive trend in DigitalOcean’s business is the fact that revenue per customer has started rising at a respectable pace. In Q1, revenue per customer was up 14% to $108.56. This shows that the company is successfully generating more value from each customer as it continues to add new features and services, something that will likely be essential for increasing profitability and keeping revenue growth high.
One very real concern with DigitalOcean, however, is its high debt load. As of the end of Q1, the company’s long-term debt totaled $1.49 billion, more than half the total market capitalization of the company as of the time of this writing. The company has also drawn down its cash reserves quickly, introducing the concern of a weakening balance sheet. At the end of 2024, DigitalOcean held $428.4 million in cash and cash equivalents. By the end of Q1, however, that had fallen to $360.4 million.
How Does DigitalOcean’s Valuation Look?
Another key factor determining whether or not DigitalOcean can bounce back is the stock’s valuation. At the moment, DOCN trades at 25.9 times earnings and 3.5x sales. These multiples are de minimis in light of the bottom line growth. The P/E ratio has also fallen off steadily, bringing it to about the lowest since 2023.
Analyst opinion on DOCN is somewhat mixed but remains more positive than negative. Analysts are still projecting a consensus target price of $38 for DigitalOcean, a price that would see the stock gain 32% from its most recent price of $28.78. The lowest target currently standing is $31, a fact that indicates analysts see far more upside than downside in DOCN. Despite this, the consensus rating on the stock is still a hold. Of the nine analysts who have offered ratings on DOCN, three rate it as a buy, while six rate it as a hold.
Will DigitalOcean Bounce Back and Is DOCN a Buy Today?
DigitalOcean isn’t a slam dunk opportunity for bulls, or bears for that matter. For sure, the top line and especially earnings are growing well thanks in large part to the concentration of high-dollar customers. But the downside is DigitalOcean has a high debt load and low gross margins.
On the valuation front, DOCN may not necessarily be especially undervalued, but the combination of rising earnings and falling prices have brought it down from from the sky high P/E range at which it once traded. The more reasonable current valuation is a sign that new buyers might enjoy an uplift if the current P&L trends persist.
Another tailwind is DigitalOcean has been quite successful in raising its net margins over time. Net margins have been steadily improving since 2022 and now stand at 13.5% for the trailing 12-month period. Though this isn’t a massive margin for a high-tech cloud computing company, it’s a plus for sure.
DigitalOcean right now looks to be more of a hold than a buy. Though it has been able to produce some decent wins over the last couple of quarters, it hasn’t yet demonstrated that it can go the distance in terms of delivering reliable, ongoing growth at the rate investors expect. If it can keep going on its current trajectory, DOCN could become a buy once its long-term picture looks a little clearer. Until then, investors may do best to take a wait-and-see approach to DigitalOcean.
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