Goldman Sachs Points to DigitalOcean as a Strong Buy Opportunity

Goldman Sachs has identified cloud computing platform DigitalOcean (DOCN) as an appealing investment opportunity, with analyst Gabriela Borges upgrading the stock to a buy rating from sell. Despite DigitalOcean’s modest year-to-date rise of nearly 6%, as opposed to the Nasdaq Composite’s 30% increase, Borges sees the company’s recent underperformance as a prime chance for investors, maintaining a price target of $33, which suggests a potential 38.4% surge over the coming year.

DigitalOcean received a double-upgrade at Goldman Sachs to Buy from Sell.

In a recent note, Borges expressed her belief that DigitalOcean is nearing a cyclical trough and anticipates that as the market environment stabilizes, the company’s strategic enhancements to its business model and cost structure will lead to improved revenue growth and free cash flowThe cash flow statement provides a detailed overview of the cash inflows and outflows of a company over a specified period of time. It includes cash received from operations, inves... More (FCF) margin expansion. The stock’s lackluster performance is attributed to the cyclical normalization in cloud optimization spending, with Borges pointing out that sectors with DigitalOcean’s heightened presence, like gaming and streaming, have been particularly affected.

Free cash flow (FCF) refers to the amount of cash that a company generates from its operations after deducting capital expenditures or investments needed to maintain or expand its asset base. It represents the cash available to the company for distribution to investors, debt repayment, or investment in growth opportunities. FCF is considered a vital measure of a company’s financial health and its ability to generate cash flow from its core operations. It is calculated by subtracting capital expenditures from operating cash flow.

Despite these challenges, Borges identified several promising developments for DigitalOcean. Notably, the company’s third-quarter results exceeded expectations, and it has made significant strides through new ventures. For instance, the acquisition of Paperspace in July bolsters DigitalOcean’s capabilities in artificial intelligence and machine learning. Additionally, DigitalOcean is enhancing its services for small to medium-sized businesses with the integration of Cloudways, a cloud hosting and SaaS provider acquired last year.

However, Borges did acknowledge potential concerns stemming from DigitalOcean’s search for a new CEO since late August, which could be creating uncertainty. Overall, the analysis by Goldman Sachs suggests that DigitalOcean’s current position presents a valuable opportunity for investors looking to capitalize on the potential uptick of this cloud computing platform.

Bottom-line: Goldman Sachs analyst Gabriela Borges has upgraded DigitalOcean to a buy status, highlighting the cloud computing company as a favorable investment with a 38.4% growth potential from its current stock price. Despite trailing behind the Nasdaq Composite’s performance this year, Borges suggests that DigitalOcean’s underperformance represents an attractive entry point for investors. She believes the company is on the brink of a cyclical recovery, poised for revenue growth and margin expansion as it stabilizes from a downturn in cloud spending in sectors like gaming and streaming. DigitalOcean’s recent acquisitions, such as Paperspace and Cloudways, are set to enhance its offerings in AI, machine learning, and cloud services for SMBs, offsetting concerns about the ongoing search for a new CEO. With a maintained price target of $33, Borges’s assessment positions DigitalOcean as a strong buy in the current market.