Shares of cloud-computing company DigitalOcean (DOCN 8.12%) jumped on Wednesday, getting a boost from investors extrapolating positive results from Amazon. Moreover, the company is getting some recognition by being added to a prominent stock index. As of 12:10 p.m. ET, DigitalOcean stock was up 8%.
Companies are spending on cloud computing again
DigitalOcean stock has essentially traded sideways over the past year because its growth is slowing considerably — management only guided for about 10% year-over-year revenue growth in 2024. However, investors use Amazon’s AWS cloud-computing platform as a barometer for how this space is doing. And investors like what they see today.
AWS just reported 25% year-over-year revenue growth in the first quarter of 2024 — a hearty increase from its 13% growth in 2023. CEO Andy Jassy said growth was boosted by “companies renewing their infrastructure modernization efforts and the appeal of AWS’s AI capabilities.”
Jassy’s comments might apply to the entire cloud-computing space and not just AWS. Therefore, DigitalOcean’s financial results might look better than expected when it reports on May 10.
Some recognition in the small-cap space
Amazon isn’t the only reason DigitalOcean stock is up today. It turns out that the stock will be joining the S&P SmallCap 600 index on May 7. This could provide the stock with an additional boost for a few more trading sessions. Index funds that track the performance of the S&P SmallCap 600 have to buy shares of DigitalOcean so they accurately reflect the index’s composition.
The issue of index funds is immaterial to long-term investors in DigitalOcean — stocks don’t always get a boost from index inclusion. And when they do, it’s usually small and short-lived. The more material driver for DigitalOcean, of course, is the business. And if Amazon’s results are any indication, this beaten-down growth stock could pleasantly surprise investors when DigitalOcean reports next week.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and DigitalOcean. The Motley Fool has a disclosure policy.
