Needham Stays Bullish On DigitalOcean; Says Growth Concerns Already Baked Into Valuation

Needham analyst Mike Cikos reiterated a Buy rating on DigitalOcean Holdings, Inc DOCN and a $36 price target, a week after initiating the coverage.
Cikos understood investor concerns about the implied slowdown in 2HCY23 growth. However, the analyst acknowledged that management's targeted 30% growth has been on a full-year basis affording the company 'wiggle-room' for certain quarters falling below the 30% threshold.
Related: DigitalOcean's 30%-Plus Revenue Growth & 20% FCF Margin Attainable In CY24, Analyst Says
The analyst believes the preliminary CY23 guidance commentary from management is the most exciting puzzle.
Investors questioned CY23 guidance amid a more challenging macro environment.
First, it indicates management's confidence in the business and the first half of next year, where DigitalOcean's financials will still benefit from the price increase and Cloudways acquisition.
Second, it should provide investors with goalposts for framing the CY23 conversation, effectively reducing share price volatility given the long lead time until DigitalOcean reports Q4 earnings.
Third, the analyst views the CY23 guidance commentary as an implicit nod to the company's line-of-sight in executing against the 30% growth bogie.
Using management's CY24 targets for $1 billion in revenue and $200 million in free cash flow implies the stock is trading at 4.0x EV/Sales and 20.0x EV/FCF, which makes DigitalOcean one of the cheapest companies in the analyst's coverage while generating strong FCF.
As an additional point to CY23 revenue growth, the analyst believes investors did not assume any contribution from improved pricing and packaging or product enhancements to crucial areas like Storage.
Cikos believe this is appropriate as initiatives sound early on both fronts.
However, both efforts have the potential to positively impact CY23 growth, providing another growth lever.
Also Read: DigitalOcean Expands Overseas Reach With New Data Center In Sydney
Price Action: DOCN shares traded lower by 6.67% at $27.97 on the last check Thursday.

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