After Leaping 30% DigitalOcean Holdings, Inc. (NYSE:DOCN) Shares Are Not Flying Under The Radar

DigitalOcean Holdings, Inc. (NYSE:DOCN) shares have had a really impressive month, gaining 30% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 40% in the last year.

Following the firm bounce in price, when almost half of the companies in the United States' IT industry have price-to-sales ratios (or "P/S") below 2.3x, you may consider DigitalOcean Holdings as a stock not worth researching with its 4.7x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

View our latest analysis for DigitalOcean Holdings

What Does DigitalOcean Holdings' P/S Mean For Shareholders?

Recent times have been advantageous for DigitalOcean Holdings as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on DigitalOcean Holdings will help you uncover what's on the horizon.

How Is DigitalOcean Holdings' Revenue Growth Trending?

DigitalOcean Holdings' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 13%. Pleasingly, revenue has also lifted 101% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

Turning to the outlook, the next three years should generate growth of 14% each year as estimated by the twelve analysts watching the company. With the industry only predicted to deliver 12% per year, the company is positioned for a stronger revenue result.

With this in mind, it's not hard to understand why DigitalOcean Holdings' P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

Shares in DigitalOcean Holdings have seen a strong upwards swing lately, which has really helped boost its P/S figure. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our look into DigitalOcean Holdings shows that its P/S ratio remains high on the merit of its strong future revenues. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Having said that, be aware DigitalOcean Holdings is showing 4 warning signs in our investment analysis, and 2 of those make us uncomfortable.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.