DigitalOcean (DOCN) Reports
DigitalOcean (DOCN) delivered Q2 results yesterday that slightly missed on revenue but beat by a good margin on EPS. Revenue was up 29% to $133.9 million (missed by $600K) while EPS of $0.20 beat by $0.10. Full-year revenue outlook was left unchanged, but profit outlook was raised as management has, and will continue to, rein in spending.
Management said some customers have slowed their pace of spending on the platform, especially in Asia and Europe (no surprise there). Also, customers in the Blockchain space were notably slower. The punchline is net dollar retention (NDR) was down 5% to 112%. Still good, just not as good as it had been. Management thinks NDR will improve in the back half of the year. Also, they saw lower than expected churn as a result of the recent price increases. This is good.
Big picture, this was a decent quarter for a company that is receiving mixed coverage. Goldman and Morgan Stanley are a little bearish on it while JP Morgan, KeyBanc and Piper Sandler are a bit more bullish. Ultimately it comes down to where you see small business spending going, specifically on the types of cloud infrastructure solutions DigitalOcean offers. And if you see the management team navigating this wonky environment well while building up a cash flow machine.
The evidence right now suggests some slowing in growth but a lot of improvement in profitability and cash flow. That shows there are levers for management to pull. Provided we don’t enter into a harsh recession, I think the stock can work, and if we get a very light or no recession and business activity ticks up, shares could surprise to the upside. In short, the story could go from “fine” to “good” and maybe to “great” in 2023.
I’m on board. Feel free to add a few shares but officially let’s stick with a Buy A Half rating for now and see how the CPI numbers and market reaction go tomorrow. BUY A HALF