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DigitalOcean (NYSE:DOCN) was downgraded to Underweight from Equal-weight by Morgan Stanley analyst Josh Baer on Monday.
Baer, who lowered the firm’s price target on the stock from $61 to $45, told investors in a note that the company’s recent outperformance reflects the benefit from pricing increases but fails to incorporate mounting risks associated with exposures to individual developers, startups, SMBs, tech companies, Europe/Asia, its Consumption model and implied 2H22 strength to reach guidance.
“With growing evidence of a slowdown in the software spend environment (see 2Q22 CIO Survey), we are narrowing our focus in our coverage universe and positioning more cautious on companies operating consumption pricing models, and see DigitalOcean with higher relative risk given exposures,” wrote Baer.
He added that while price increases should be viewed as a net positive, they do not think DigitalOcean’s risks and exposures have been fully priced into the stock.
The analyst outlined four critical reasons for the downgrade, including a weaker macro environment, European/Asian headwinds starting to surface, the company’s consumption pricing model being less favorable in the current environment, and the degree of quarterly beats having declined.
“We move our rating from Equal-weight to Underweight based on the combination of these risks and we reduce our price target from $61 to $45. With shares trading at ~7.6x EV/2023 Sales or 0.24x on a growth adjusted basis vs. SMid software peer median at ~4.8x EV/2023 Sales or 0.23x on a growth adjusted basis, the stock looks somewhat overvalued, in our view, given DigitalOcean’s risks and exposures,” concluded the analyst.
