1 Mid-Cap Stock Has Doubled in 4 Months — Is It Too Late to Buy?

Investors Turned Out to be Interested in Small Emerging Cloud Computing Platforms digital ocean (DOCN 1.27%) There wasn’t one, but two A big buying opportunity. After bottoming out in the bear market at the end of 2022, stocks skyrocketed in the first half of 2023. But then the company suffered from slowing revenue growth, the discovery of past accounting errors, and the stock reached new all-time lows later that year. A shakeup at the CEO level was announced.

DigitalOcean (DO) is on the rebound again, doubling in value in the past four months. With his 2023 final earnings report and his 2024 outlook, the market is feeling okay about the cloud business again. Is it too late to buy?

New CEO with technical background

DO did pretty well last year considering some of the drama. The company provides remote data center computing power to startups and small and medium-sized businesses (SMBs), a high-growth industry that has weathered much of the bear market in recent years.

But as we consider our actions for 2024, we should start by addressing the CEO issue. Yancey Spruill announced his resignation in the second half of last year, following a remarkable tenure that included a DO IPO in early 2021, the acquisition of managed cloud hosting company Cloudways in 2022, and the acquisition of GPU-based AI training platform Paperspace last year. Ta. We also repurchased nearly $1.1 billion in stock, more than offsetting the impact of stock compensation over the past two years.

Along the way, Spruill helped DO monetize in every way possible while keeping the small cloud platform in growth mode despite competition from tech giants. DO ended 2023 with a GAAP net margin of 2.8% (including 8.8% net margin in the fourth quarter of 2023) and full-year free cash flow (FCF) of $110 million (FCF margin of 15.9%) .

But now that the bear market is over and investors are satisfied (for now) with the balance between growth and profitability, the board has probably recognized the need for change. Then new CEO Paddy Srinivasan appears. Mr. Srinivasan has a background in software engineering and has held various corporate positions. Amazon, oracleand microsoft. He is also the founder and CEO of a cloud monitoring startup that was acquired by Microsoft in 2012, and most recently he served as CEO of the IT software services company GoTo (formerly known as LogMeIn).

The change in leadership is clear, at least to me. DO is on the offensive again as cloud computing remains a long-term growth trend. Bringing in a fresh perspective with a technical background can help DOs develop new services and attract new developers and small business customers.

Is DigitalOcean gearing up for further advancement?

DO stock is trending up again, likely due to the fact that it was very cheap again a few months ago. Even after doubling in price, the stock still trades at around 33x 12-month FCF as of this writing.

Will DO prices rise further? It’s possible, but it depends on the execution.technical researcher gartner predicts that cloud computing spending will increase by more than 20% in 2024, with cloud infrastructure and related app development services (DO’s area of ​​expertise) driving that growth.

But Srinivasan and his team’s initial outlook for 2024 is for revenue to rise just 10% to $765 million at the midpoint of guidance. There are a number of factors that could be influencing the expected performance decline in the overall cloud market, including the downturn in DO’s primarily SMB customers given the tough economic conditions. It’s also possible that DO is simply being cautious about its growth projections as Srinivasan becomes more familiar with the business.

When I invest in small and medium-sized companies like this, I want to own companies that: exceed In any case, we expect DO to maintain FCF profitability this year as it invests in new growth initiatives. It’s been a tough journey and we need to rebuild trust. But I’m happy to hold on to DO stock, even if it’s not worth what it was a few months ago. I plan to give DigitalOcean and its new CEO at least a few quarters before making a decision.