What Happened: Shares of cloud computing provider DigitalOcean (NYSE: DOCN) jumped 7.6% in the morning session after the S&P Dow Jones Indices announced that the company will replace Agiliti Inc. (AGTI) in the S&P SmallCap 600 index before the opening of trading on Tuesday, May 7, 2024.
Being included in the index means that DigitalOcean will likely be held by many mutual funds and ETFs, which could potentially drive up demand for the stock.
We note that while buying of the stock could increase, this development does not change the fundamentals of the company. Revenue growth, expense efficiency, and capital intensity of the business, for instance, are not impacted by index inclusion or exclusion, so this is more of a technical tailwind for the stock.
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What is the market telling us: DigitalOcean's shares are very volatile and over the last year have had 20 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The biggest move we wrote about over the last year was 2 months ago, when the stock gained 14.6% on the news that the company reported fourth quarter results and delivered very solid free cash flow. Its revenue narrowly outperformed Wall Street's estimates while EPS beat by a more convincing margin. On the other hand, gross margin decreased.
Looking ahead, revenue guidance for the next quarter and full year came in roughly in line with expectations. Having experienced macro challenges in 2023, management provided a more encouraging outlook on the business environment adding, "While top line pressure lasted longer into 2023 than we had originally expected, we saw a bottoming of the headwinds in Q3, and with stable net dollar retention and steady growth in Cloudways in the second half, we exceeded the revised full year revenue outlook." Zooming out, this was still a decent, albeit mixed, quarter, showing that the company is staying on track.
DigitalOcean is down 1.8% since the beginning of the year, and at $35.54 per share it is trading 28.8% below its 52-week high of $49.90 from July 2023. Investors who bought $1,000 worth of DigitalOcean's shares at the IPO in March 2021 would now be looking at an investment worth $837.18.