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Goldman double upgrades this under-the-radar cloud stock with nearly 40% upside

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Cloud computing platform DigitalOcean is at an attractive entry point, according to Goldman Sachs. Analyst Gabriela Borges upgraded DigitalOcean to buy from sell and maintained her price target of $33, which implies the stock could jump 38.4% over the next 12 months. Borges cited the stock’s significant underperformance — DigitalOcean is up nearly 6% this year, while the Nasdaq Composite has gained 30% — as an opportunity for investors. Shares popped 13% Tuesday. “We believe the business is now approaching a cyclical trough,” Borges wrote in a Tuesday note. “As macro stabilizes, we believe the structural improvements that DO has made to its mix shift and cost structure will become more obvious, driving better revenue growth and continued [free cash flow] margin expansion.” The underperformance has likely been driven by a cyclical normalization in cloud optimization spending, according to Borges. She said this trend has been especially acute in areas where DigitalOcean has outsized exposure, such as video games, streaming and web agencies. The analyst estimated that DigitalOcean’s organic revenue growth rate, excluding M & A and pricing, has slowed from 36% in the first quarter of 2022 to low single digits in the third quarter of this year. Borges highlighted positive catalysts ahead for the business, including DigitalOcean’s better-than-expected revenue and earnings for the third quarter and the company’s contributions from its newer initiatives. These initiatives include DigitalOcean’s July acquisition of Paperspace , which should expand the company’s artificial intelligence and machine-learning capabilities, and its ongoing ramping of Cloudways, a cloud hosting and SaaS provider for small- to medium-size businesses acquired last year. Borges noted overhang from DigitalOcean’s ongoing search for a new CEO since late August. “We do not expect to see a material shift in DO’s strategy and we already incorporate a moderate investment cycle in our 2024 forecast,” until a new CEO is announced, Borges said. — CNBC’s Michael Bloom contributed reporting.

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