As the markets turn bearish again this Monday, DigitalOcean (NYSE:DOCN) stock is among the leading laggards. DOCN stock is down about 15% at the time of this writing as a plethora of growth stocks experience selling pressure.
Today, a bearish note from Morgan Stanley analyst Josh Baer appears to be driving the decline in DOCN stock. Baer downgraded DigitalOcean to underweight, cutting his price target from $61 per share to $45.
Given that shares closed above that price target yesterday, investors may have expected to see some decline with this cloud-computing platform company. However, the dramatic decrease we’re seeing today suggests many are siding with Baer.
Let’s dive into what’s causing so much concern with DOCN stock today.
Why Is DOCN Stock Down So Sharply Today?
A significant price target cut alongside a downgrade is bad news. However, the reasons for the downgrade are likely what has investors most worried right now.
In his note, Baer points out that the macro environment for software companies isn’t strong right now. Accordingly, DigitalOcean’s exposure to small- and medium-sized companies, including startups, is not very ideal. That means more downside pressure may be in the cards.
DigitalOcean’s churn rate — or how many customers leave as a percentage of the company’s overall customer base — will be a key metric to watch. As the company looks for growth in what could be a deteriorating environment, higher spending may erode margins over time. Accordingly, investors will also want to watch DigitalOcean’s margins moving forward.
To top it off, Baer’s note highlights concerns about the company’s exposure in Europe and Asia. The market is still overshadowed by geopolitical concerns. So, given DigitalOcean’s apparent sensitivity to key issues like Russia’s war with Urkaine, the slow resolution of these events could be another headwind.
Overall, the analyst note certainly provides investors with a lot of food for thought. While many investors may remain bullish on its long-term prospects, it’s worth noting that DOCN stock may be under pressure — at least near-term — moving forward.
On the date of publication, Chris MacDonald did not hold (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.
