While many tech stocks have been booming as of late, DigitalOcean(NYSE: DOCN) and Paycom(NYSE: PAYC) have missed the boat. Both stocks are down around 70% from their pandemic-era highs, with the companies challenged by growth slowdowns.
Both DigitalOcean and Paycom are profitable and have bright futures, but their stories are being muddled by short-term issues. Here's why it's a great time to buy both stocks.
DigitalOcean
DigitalOcean has carved out a niche within the cloud computing market by focusing on developers and small businesses. The company's platform isn't nearly as extensive as that of Amazon Web Services. Instead of offering hundreds of different products and services fulfilling any and all needs, DigitalOcean focuses on getting the basics right.
This strategy has won over plenty of customers. The company ended the second quarter with 161,000 customers spending at least $50 per month. Quarterly revenue is approaching $200 million and still growing at a double-digit rate. Importantly, DigitalOcean is already soundly profitable, producing positive generally accepted accounting principles (GAAP) net income and free cash flow.
The stock market bought into the DigitalOcean story during the pandemic, sending the stock soaring. But as growth slowed, sentiment soured. Since peaking in late 2021, shares of DigitalOcean are down a whopping 71%. Revenue grew by 13% year over year in the second quarter.
DigitalOcean got a new CEO earlier this year in Paddy Srinivasan, a veteran of the software-as-a-service industry. Srinivasan has expanded the leadership team with a focus on accelerating product development and growing the developer community. The company released 24 new product features in the first half of 2024, twice as many as the previous six months.
While it will take time for DigitalOcean to reaccelerate its growth, there's a lot to like about the company right now. The market opportunity is large, with an estimated $213 billion in annual spending on infrastructure as a service and platform as a service from small businesses and developers expected in 2027. The valuation is also attractive, with the stock trading for about 22 times full-year adjusted earnings guidance.
DigitalOcean has the potential to multiply its revenue over the next decade as it taps into incredible demand for cloud computing without the complexity. Eventually, the stock price will catch up and reflect the company's long-term potential.
Paycom
Paycom is a payroll and HR software company that aims, first and foremost, to deliver value to its customers. This is a winning long-term strategy, but it's one that can look like the wrong move in the short run.
Case in point: Paycom's innovative Beti payroll product. Beti enables a customer's employees to do their own payroll, which can improve accuracy and greatly cut down on the HR man-hours spent dealing with mishaps and mistakes.
One example Paycom CEO Chad Richison gave during the second-quarter earnings call was a client that was able to slash its payroll department in half by implementing Beti, reducing the payroll process from four days to a few hours. That's a huge win for the client.
The downside, at least in the near term, is that the expansion of Beti has cut into revenue from other sources. This has hurt the company's growth rate and left a bad taste in investors' mouths. Revenue grew by just 9.1% year over year in the second quarter of 2024 as the company grapples with these dynamics. Paycom stock has plunged 70% since peaking in late 2021.
This is a case of the market missing the forest for the trees. Paycom is helping its customers cut costs and become more efficient with Beti, and that will pay off in the form of decreased customer churn and increased customer loyalty. The company is positioning itself for stronger growth in the future by sacrificing some growth today.
With Paycom stock trading for roughly 21 times the average analyst estimate for full-year adjusted earnings, it's a great time to buy the stock and wait for a comeback.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Timothy Green has positions in DigitalOcean and Paycom Software. The Motley Fool has positions in and recommends Amazon, DigitalOcean, and Paycom Software. The Motley Fool has a disclosure policy.
