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Is the Red Ebb Tide in Digital Ocean Stock Over?


It was a sea of red in high-tech growth stocks Wednesday including shares of Digital Ocean Holdings (NYSE:DOCN). And today is shaping up as another doozy. But is DOCN stock now fully-vaccinated against its bear market?

A laptop screen displays the logo for DigitalOcean (DOCN).
Source: monticello / Shutterstock.com

Let’s take a look at what’s happening in DOCN off and on the price chart, then offer a risk-adjusted determination for investors aligned with those findings.

There’s no way around it. Wednesday was an ugly one for investors who’ve been dabbling or gorging on growth stocks.

From A to Z or maybe Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) to Zillow (NASDAQ:Z) versus Archer-Daniels Midland (NYSE:ADM) to Zurn Water Solutions (NYSE:ZWS), the divide pitting forlorn growth investors against emboldened value seekers turned into a chasm yesterday.

And unsurprisingly DOCN stock, and one the market’s recent can’t-go-wrong favorites, wasn’t immune to the sell-off. However, on the back of raised rate and Covid-19 fears working against growth stocks, the small-to-mid-size business (SMB) cloud-computing specialist tumbled 5%.

Moreover, since striking in all-time-high of $133.40 in the second half of November, truncated large-cap now valued at $9 billion has seen a bearish ebb tide peel roughly 50% from DOCN’s peak capitalization at the onset of Thursday’s session.

 Is it Time to Act and Purchase DOCN stock?

All stocks do go through corrections, particularly after larger feats of optimism. And surely Digital Ocean’s bullish surge of about 280% in less than six months qualifies.

A growing bear population of nearly 19% may see things differently. Optimistically though, that group has been dead wrong before. Ever hear of Tesla (NASDAQ:TSLA), Netflix (NASDAQ:NFLX) or Amazon (NASDAQ:AMZN)? I thought so.

There’s more too though.

Despite today’s bearish market sentiment regarding riskier growth narratives, DOCN is already delivering in spades to more nearly 600,000 SMB customers who see the value-add in Digital Ocean’s simplified cloud services platform.

Bottom-line, Digital Ocean isn’t simply a great pitch of what one day might be. Those same customers have allowed quarterly revenues to grow at a healthy 37% from the prior year, capture average per customer sales growth of 28% and deliver break-even results in the third quarter.

That’s Not All Either

If we’re to trust management’s bullish CAGR of 27% over the next couple years, DOCN stock could turn into a multi-bagger that justifies and easily dwarfs this year’s more obsessive reach in shares.

And if you don’t rely on mine or management’s word, take it from the horse’s or rather a former bear’s mouth.

Back in August and responsible for putting some of the early sizzle into Digital Ocean, well-regarded and former bearish short stock boutique Citron Research, set a price target of $200 on DOCN shares.

The outfit’s front man Andrew Left compared Digital Ocean’s business model and growth opportunity to Shopify (NYSE:SHOP), another former battleground stock and one of today’s undisputed tech giants, as well as a SHOP stock which Citrus failed to see the real writing on the wall.

DOCN Stock Weekly Price Chart

Digital Ocean (DOCN) weekly and well-supported double-bottom forming

Source: Charts by TradingView

While we’re not likely to hear from Andrew with an update on his recommendation, right now the DOCN price chart is making a plea for a bottom and an end to the stock’s bearish cycle.

Technically, a smaller weekly chart double-bottom pattern is forming on top of Digital Ocean’s lifetime 62% Fibonacci level and an angular price support line. And today it’s worth monitoring for a purchase.

I’d like to see shares trade through this week’s candle high of $81.38 and price action accompanied by a bullish widening of the slow and fast stochastic lines before considering a purchase.

Should those conditions be met, I’d give the benefit of the doubt to an ironclad May $70 married put position and upgrading into a DOCN stock collar if today’s ebb tide turns into a more bullish flood of buyers in the weeks to come.

On the date of publication, Chris Tyler did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.

The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.

Article printed from InvestorPlace Media, https://investorplace.com/2022/01/docn-stock-is-the-red-ebb-tide-in-digital-ocean-stock-over/.

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