What Happened:
Shares of cloud computing provider DigitalOcean (NYSE: DOCN) jumped 12.8% in the morning session after the company reported second quarter earnings results. DigitalOcean exceeded analysts' ARR (annual recurring revenue) expectations this quarter. Its billings also outperformed Wall Street's estimates. Notably, the company called out the growing adoption of its AI offerings (from the recent acquisition of Paperspace), which recorded over 200% year-over-year ARR growth. Overall, this was a strong quarter for the company.
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What is the market telling us:
DigitalOcean's shares are very volatile and over the last year have had 23 moves greater than 5%. But moves this big are very rare even for DigitalOcean and that is indicating to us that this news had a significant impact on the market's perception of the business.
The previous big move we wrote about was 9 days ago, when the company gained 6.1% as the major indices soared (Nasdaq up 3%, S&P up 2%) while yields declined after the Federal Open Market Committee kept interest rates unchanged at 5.25% to 5.5% following the July 2024 policy meeting. However, a more important factor that drove the rally is related to Fed Chair Jerome Powell's dovish comments, which revealed the committee's readiness to begin cutting rates as additional data confirms inflation is under control. The Fed Chair added, "If that test is met, a reduction in our policy rate could be on the table as soon as the next meeting in September."
As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. With lower interest rates, investors can apply higher valuations to their stocks.
We at StockStory remain cautious, as following the crowd can lead to adverse outcomes. During times like this, it's best to own high-quality, cash-flowing companies that can weather the ups and downs of the market.
DigitalOcean is down 9.3% since the beginning of the year, and at $32.72 per share it is trading 20% below its 52-week high of $40.88 from February 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 $773.41.
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