This Beaten-Down Growth Stock Could Soar 32%, According to Wall Street

If you’re like most investors, you’re already familiar with the big three cloud service providers — Amazon, Microsoft, and Alphabet. Many of the world’s largest online businesses run on these three platforms, but most small to medium-sized businesses (SMBs) can’t justify their cost.

DigitalOcean (DOCN -1.38%) is a cloud computing service provider for heaps of SMBs that can’t swallow the expenses they’d incur with an account at one of the big three providers. The COVID-19 pandemic quickly created a lot of demand for its services, which caused the stock to spike in 2021. Unfortunately, it’s been trading about 76% below its previous peak.

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DigitalOcean stock is way down from its previous peak, but Wall Street analysts who follow the business think it can begin a strong comeback soon. A consensus price target of $41.60 a the moment implies a gain of about 32% from recent prices.

Before you get too excited about price targets set by sell-side analysts, it’s important to remember they can quietly adjust their targets downward if things don’t work out. Repairing the damage a bad call could inflict on your savings isn’t as easy. Here’s a closer look to see if this growth stock could be right for your portfolio.

Why Wall Street’s bullish for DigitalOcean

It’s hard to overstate the amount of demand out there for cloud computing. In the second quarter, Amazon Web Services (AWS) racked up an annualized $123.6 billion in sales. That was 17.5% more than it recorded a year earlier. While AWS caters to many of the world’s largest businesses, inexperienced developers wouldn’t describe its services as user-friendly.

Individual developers, startups, and SMBs appreciate DigitalOcean’s user-friendly interface, ultralow starting costs, and new artificial intelligence (AI) features. Earlier this year, the company launched its Gradient AI platform that allows developers to produce their own AI agents by combining their data with popular large language models.

DigitalOcean’s new AI tools are a hit with its customer base. Second-quarter sales grew 14% year over year to an annualized $876 million. Sales have a lot more room to grow. Total revenue at DigitalOcean is less than 1% the amount AWS has been raking in.

Despite offering developers a relatively low-cost service, DigitalOcean is generating a very healthy profit. In the second quarter, free cash flow grew to $57 million, which was 26% of revenue during the period. DigitalOcean doesn’t pay dividends, but the company isn’t shy about returning profits to shareholders as share buybacks. Its outstanding share count is down 16.6% from its peak in 2021.

DigitalOcean finished June with $1.5 billion in debt, but it probably won’t have any trouble servicing that debt. The company recently sold $700 million worth of zero-interest convertible notes due in 2030 to refinance similar notes due in 2026.

Time to buy?

Wall Street’s practically pounding the table on this stock. Among 13 investment bank analysts who follow DigitalOcean, eight have given it a buy rating. None of them suggests selling at the moment.

While Wall Street’s recommendation is clear, this stock is still a long way from risk-free. After all, there are more than a few cloud service providers courting smaller organizations. DigitalOcean has been able to refinance its debt load with zero-interest notes, but there are no guarantees it can continue sourcing ultra-cheap capital in the future.

Concerns about DigitalOcean’s debt load are easily alleviated by the stock’s relatively low valuation. At recent prices, you can scoop up shares for about 15.2 times the midpoint of management’s earnings expectation for 2025.

For folks nearing retirement, this might not be the best stock to buy. If you have a relatively strong risk tolerance, though, adding some shares to a diverse portfolio now and holding them for the long run looks like the right move.