Cloud Company DigitalOcean Has Seen a Sharp Rise In Short Interest

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Short interest data can help active investors avoid losses. Research shows that short sellers are skilled at processing information. It also shows that heavily-shorted stocks tend to underperform.

In this report, we are going to look at the short selling data on DigitalOcean Holdings Inc (DOCN:US). DigitalOcean is a cloud computing company that offers on-demand infrastructure and software tools for developers, start-ups, and small and medium-sized businesses (SMBs). It is listed on the New York Stock Exchange and currently has a market cap of around $3.35 billion.

Rising Short Interest

Looking at the data on DigitalOcean, we see a couple of things that are worth highlighting.

One is that short interest has risen dramatically recently. Four months ago, there were 9.2 million shares on loan here. Today, however, the figure stands at 15.83 million. So, short interest has climbed by approximately 72% over this period. This tells us that short sellers have been ramping up their downside bets here lately.

Another is that short interest is now quite high. 15.83 million shares equates to around 28.29% of the company’s free float, meaning that DigitalOcean is one of the most shorted stocks in the market right now.

Why Are Short Sellers Targeting DigitalOcean?

It’s hard to know exactly what the short sellers are focusing on here.

It could be macro risk. Late last year, analysts at JP Morgan downgraded DigitalOcean to ‘neutral’ from ‘overweight’ on the back of concerns over near-term headwinds to growth trends. More recently, analysts at Piper Sandler downgraded the stock to ‘underweight’ from ‘neutral’ citing the company’s high exposure to SMBs and the associated risks as the economy weakens.

"The macro environment isn't improving, with the NFIB's Small Business survey in a downtrend. Tighter budgets and cloud optimizations will potentially limit upsell and cross-sell opportunities," wrote Piper Sandler’s analysts.

It could also be related to competition. The cloud computing industry is extremely competitive and DigitalOcean is up against some big players. One company that has been having a lot of success recently is Oracle. Earlier this month, it reported revenue from its cloud services and license support unit of $9.37 billion for the quarter, up from $7.61 billion a year earlier.

Of course, the short sellers could also be focused on the stock’s recent rise and current valuation. Year to date, DigitalOcean shares are up around 50%. And at current levels, the company has a price-to-sales ratio of around six.

Whatever it is the short sellers are focused on here, we think caution is warranted towards the stock in the near term. In our view, the high level of short interest is a red flag.