By Sam Boughedda
DigitalOcean Holdings Inc (NYSE:DOCN) was downgraded to Neutral from Overweight by JPMorgan on Monday, with its price target cut to $27 from $50 per share.
JPMorgan analysts told investors in a note that DigitalOcean's Q3 "marked a material slowdown in organic revenue and net-new ARR additions, as it was impacted by a challenging macro environment, in addition to continued headwinds from Russia/Ukraine and the Blockchain vertical."
The analysts added that based on the current guidance, they expect the headwinds to persist, resulting in a continued moderation of organic revenue growth over the next few quarters, with a potential for organic growth to slow to high-single digits before potentially normalizing in the 2H of 2023, although the analysts stated it would depend on the macro environment at that time.
"While DigitalOcean reiterated its goal to reach $1B in revenue in 2024, we are finding it a bit difficult to underwrite the implied ~34% organic growth for 2024 as of now, given the macro uncertainty, and we think the company might require additional M&A and/or pricing and packaging support to achieve its goal. While we remain positively biased longer term on the market opportunity for DigitalOcean given the strong product-market fit, we expect 2023 organic revenue growth to now slow to the high-teens, below our original estimates of high 20s%. As such, we are downgrading the stock to Neutral from Overweight as we now see DigitalOcean shares as largely fairly valued at current price levels," wrote the analysts.
Elsewhere, Barclays analysts maintained an Overweight rating on DigitalOcean but cut the firm's price target on the stock to $37 from $45 per share.
"DigitalOcean's 3Q results positively showed ARPU will continue to be the most influential driver for growth. There are several levers for DOCN to pull after its broad-based price increase, from product bundling to cross-selling DigitalOcean/Cloudways. Yet, we expect shares will remain volatile near-term as investors question how DOCN will get to its FY24 $1bn revenue growth target, which implies revenue growth >30%, in this macro environment. DOCN has seen significant headwinds from blockchain, international and SMB which have caused net new ARR growth to contract," said the analysts.