What Happened?
Shares of cloud computing provider DigitalOcean (NYSE: DOCN) jumped 21% in the pre-market session after the company reported strong fourth-quarter 2024 results, surpassing analysts' expectations for revenue, EPS, and EBITDA. Revenue grew 13% y/y, driven by a sharp rise in spending from its top-tier customers, whose contribution to overall revenue jumped 37%. Additionally, full-year EPS guidance came in above Wall Street estimates. Overall, we think this was still a solid quarter with some key areas of upside.
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What The Market Is Telling Us
DigitalOcean’s shares are very volatile and have had 21 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 previous big move we wrote about was a day ago when the stock dropped 6.1% as markets continued to struggle following the broad selloff triggered by weak economic data in the previous week. On Friday, February 21, 2025, the S&P 500 dropped 1.7%, and the Nasdaq fell 2.2% after PMI numbers showed the U.S. services sector contracted, and the University of Michigan's consumer sentiment index came in below expectations.
Adding to Wall Street's anxiety, rumors swirled that Microsoft is trimming some data center projects, raising concerns that AI-related investments may get a little too bloated.
TD Cowen analyst Michael Elias flagged three key findings from his research. He noted that Microsoft "1) cancelled leases in the U.S. totaling 'a couple of hundred MWs' with at least two private data center operators, 2) has pulled back on the conversion of SOQ's to leases, and 3) has re-allocated a considerable portion of its international spend to the U.S."
Jefferies analysts see this as more of a regional spending adjustment, adding that Microsoft executives "strongly refute" any major shift in their data center strategy.
Investors' attention now turns to Nvidia's upcoming earnings report, a crucial barometer of AI infrastructure demand. The chip giant's Q4 2024 results and forward guidance will be closely scrutinized for signals on whether AI spending remains strong or is beginning to taper off. With so many moving pieces, investors are bracing for a volatile week ahead, while hoping for clarity.
DigitalOcean is up 21.3% since the beginning of the year, but at $41.55 per share, it is still trading 11% below its 52-week high of $46.69 from February 2025. Investors who bought $1,000 worth of DigitalOcean’s shares at the IPO in March 2021 would now be looking at an investment worth $977.65.
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