Trying to time the stock market (i.e. buying a stock at its absolute low and selling it at its peak) is difficult to do well. The path a stock takes as it doubles or triples can involve painful declines and long periods of frustration. For most investors, focusing on buying quality stocks at reasonable prices is the best way to become big winners in the long run.
Two stocks that have the potential to rise are cloud computing providers DigitalOcean (NYSE: DOCN) And Walt Disney (NYSE: DIS).
DigitalOcean
The cloud infrastructure market is dominated by a few heavyweights Amazon Web services (AWS) at the top of the heap. AWS and its ilk are tailor-made for enterprises with significant IT resources. Cloud platforms are large and complicated, and prices often have many variables that are difficult to predict.
For small businesses and developers who don’t need the endless catalog of services offered by the likes of AWS, simpler cloud platforms are available. DigitalOcean is a leader in this part of the cloud market, and while the company’s growth has slowed, the long-term picture remains bright.
DigitalOcean had nearly 640,000 customers at the end of the first quarter, although most of the company’s revenue comes from its approximately 160,000 customers who spend at least $50 a month. Although there is quite a bit of customer churn, the highest spending group is growing the fastest. The number of customers spending at least $500 per month increased 12% year over year in the first quarter.
This growth in the number of larger companies is driven in part by corporate efforts to offer higher value services. DigitalOcean acquired managed cloud hosting provider Cloudways in 2022, which added much more expensive cloud computing plans with much more dexterity. But for a small business that wants to start a WordPress site without much hassle, paying a hefty premium makes sense.
The company has also launched new products, including a managed Kafka service that undercuts price competition. Kafka enables asynchronous communication between different systems without tightly coupling these systems. By removing the complexity inherent in running software like Kafka, DigitalOcean has delivered a high-quality service focused on its largest customers.
According to the company’s outlook, DigitalOcean’s revenue growth will only be about 10% this year, but that’s partly because customers aren’t increasing their spending on core cloud computing services. The company’s growing catalog of high-quality services should help accelerate growth in the coming years.
What makes DigitalOcean a solid investment is the company’s free cash flow (FCF). Even as revenue growth slows, the company expects to convert about 20% of those revenues into FCF this year. Based on the current share price, that equates to a price/FCF ratio of roughly 22. That’s not a clear bargain, but it’s not expensive either.
With the total addressable market expected to grow to $213 billion by 2027, double-digit revenue growth combined with strong cash generation could drive DigitalOcean stock much higher in the coming years.
Disney
Disney shares are down nearly 50% from their all-time high as the iconic entertainment company grapples with a changing industry. The company’s parks and cruise lines are doing well, but the linear TV business is fading as streaming becomes the norm and the film studio is burdened by too many lackluster releases.
Disney’s revenue rose 1% in the latest quarter, although that growth was driven almost entirely by the company’s parks and cruise lines. Linear TV networks saw their revenues fall by 8%, and the film industry saw a decline of 40%.
Disney has embraced streaming and has more than 117 million Disney+ subscribers, along with more than 50 million subscribers for its Hulu service. But streaming has been a big source of losses in recent years, so the company is doing everything it can to increase profitability. The streaming company posted a small operating profit in the last quarter, a positive swing of more than $600 million compared to the same period last year.
In the film segment, Disney now prioritizes quality over quantity. The company has released too much mediocre content that has diluted its brand. Now it will release up to three Marvel films a year as it looks to rebuild the franchise around quality.
There are a lot of moving parts as Disney pulls off a turnaround, and a high level of uncertainty is likely to weigh on the stock. But the company’s collection of world-class media assets, along with its talent for leveraging these assets across its business, make it an attractive investment.
It’s difficult to value Disney right now as earnings numbers are low, but its price-to-sales ratio is currently at the lower end of the stock’s historical range. With the streaming sector starting to turn a profit and the movie segment recovering, Disney stock could be in for a big recovery.
Should You Invest $1,000 in DigitalOcean Now?
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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 Walt Disney. The Motley Fool holds and recommends positions in Amazon, DigitalOcean, and Walt Disney. The Motley Fool has a disclosure policy.
2 Stocks to Buy Before They Take Off was originally published by The Motley Fool
