What Happened?

Shares of cloud computing provider DigitalOcean (NYSE: DOCN) fell 16.1% in the morning session after the company reported third-quarter earnings results and provided underwhelming guidance with sales outlook for the next quarter roughly in line with analysts' estimates, while its EPS forecast missed. Also, sales came in roughly in line during the quarter, unexciting, and not enough for the market. Given the company's recent AI bets and potential in the SMB space, expectations were likely high, heading into earnings. However, the company provided some encouraging updates, announcing the early availability of its first GenAI Platform. Overall, this quarter was mixed, with the guidance weighing on shares.

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What The Market Is Telling Us

DigitalOcean’s shares are very volatile and have had 22 moves greater than 5% over the last year. But moves this big are rare even for DigitalOcean and indicate this news significantly impacted the market’s perception of the business.

The biggest move we wrote about over the last year was 9 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. In addition, 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 (a measure of customer revenue retention over time) and steady growth in Cloudways (managed cloud computing service) 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 0.8% since the beginning of the year, and at $35.92 per share, it is trading 18.4% below its 52-week high of $44 from October 2024. Investors who bought $1,000 worth of DigitalOcean’s shares at the IPO in March 2021 would now be looking at an investment worth $845.76.

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