Former short seller Andrew Left and his Citron Research see shares of cloud-computing firm DigitalOcean soaring on a “mega trend.”
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DigitalOcean Holdings stock spiked Monday after the newly public cloud-computing company got a ringing endorsement from an unusual source: the former short seller Andrew Left and his firm Citron Research.
DigitalOcean (ticker: DOCN) stock arrived in the public market on March 24, selling 16.5 million shares at $47 each. It was an inauspicious debut—the stock closed the first day of trading at $42.50. But shares have inched higher in recent weeks—and thanks to Citron, the stock on Monday rallied nearly 13% to $58. In his research note, Left set a target price on the stock of $200.
In January, Citron announced via Twitter that it had decided to stop publishing short-side research reports, and instead will “focus on giving long-side multibagger opportunities for individual investors.” And he apparently thinks DigitalOcean stock fits that description.
Left compares the opportunity for DigitalOcean to Shopify (SHOP), which has produced astonishing growth offering cloud-based e-commerce software tools to retailers.
“One of the greatest blunders we have made over the past 20 years of publishing Citron Research is not realizing the power of Shopify when the stock was $100,” he writes in the report. (Shopify is now trading at about $1,538.) “At the time it seemed like another overpriced software company that allowed people to perform the simplest of tasks…making websites.”
But Left says he failed to recognize that customers love the product, and that the small-and-medium-sized business (SMB) market was larger than he had thought. He also says that he missed “the power of a passionate and dedicated developer network,” and the potential for cross-selling new products.
“Citron has been waiting patiently for another company to come along with the same profile, hoping with fingers crossed that valuation would be investible,” he writes, “and it has finally come to market.”
DigitalOcean is a cloud-computing platform specifically built for small businesses, with pricing that is a fraction of that charged by larger cloud providers like Amazon.com (AMZN), Alphabet (GOOGL), and Microsoft (MSFT). “We’ve seen this movie before, and just like how Shopify and Square (SQ) saw that SMBs were not far behind large enterprises in adopting e-commerce and digital payments, DigitalOcean is in the leading position to capitalize on this mega trend,” he writes.
DigitalOcean reports June-quarter earnings before the market opens on Thursday. The company has projected revenue of $97 million to $99 million for the quarter, and revenue of $405 million to $409 million for the year ending December. For the June quarter, Street consensus estimates call for $98.3 million in revenue and profits of 5 cents a share, according to FactSet. Left correctly notes that Amazon, Alphabet, and Microsoft all showed acceleration in their cloud businesses in the June quarter.
Write to Eric J. Savitz at [email protected]
