2 Stocks to Buy Before They Take Off


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Trying to time the stock market — i.e., buying a stock at its absolute low and selling at its peak — is tough to get right. 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 end up with big winners in the long run.

Two stocks that have the potential to soar are cloud computing provider DigitalOcean (NYSE: DOCN) and Walt Disney (NYSE: DIS).

DigitalOcean

The cloud infrastructure market is dominated by a few heavyweights, with 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 big and complicated, and pricing tends to have a lot of variables that can be hard to predict.

For small businesses and developers that don’t need the endless catalog of services offered by the likes of AWS, there are simpler cloud platforms available. DigitalOcean is a leader in this portion 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 the bulk of the company’s revenue comes from the approximately 160,000 customers who spend at least $50 per month. While there’s quite a bit of customer churn, the highest-spending group is growing the fastest. The number of customers spending at least $500 per month shot up 12% year over year in the first quarter.

This growth in the number of bigger spenders is partly driven by the company’s efforts to offer higher-value services. DigitalOcean acquired the managed cloud-hosting provider Cloudways in 2022, which added much pricier cloud computing plans with far more hand-holding. But for a small business that wants to get a WordPress site up and running without much fuss, paying a hefty premium makes sense.

The company has also been launching new products, including a managed Kafka service that undercuts competitors on price. Kafka enables asynchronous communication between different systems without tightly coupling those systems together. By removing the complexity inherent in running a piece of software like Kafka, DigitalOcean has delivered a high-value service aimed at its largest customers.

DigitalOcean’s revenue growth will only come in at about 10% this year, according to the company’s outlook, but that’s partly due to customers not expanding spending on core cloud-computing services. The company’s expanding catalog of high-value services should help accelerate growth in the years ahead.

What makes DigitalOcean a solid investment is the company’s free-cash-flow (FCF) generation. Even as revenue growth slows, the company expects to convert about 20% of that revenue into FCF this year. Based on the current stock price, that works out to a price-to-FCF ratio of roughly 22. That’s not a clear-cut bargain, but it’s not expensive, either.

With a total addressable market expected to grow to $213 billion by 2027, double-digit revenue growth coupled with strong cash generation could drive DigitalOcean stock much higher over the next few years.

Disney

Shares of Disney 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 line are doing well, but the cash-cow linear TV business is fading as streaming becomes the norm, and the film studio is being weighed down by too many lackluster releases.

Disney’s revenue edged up 1% in the latest quarter, although that growth was driven almost entirely by the company’s parks and cruise line. Linear TV networks saw revenue slump 8%, and the film business suffered a 40% decline.

Disney is embracing streaming and has over 117 million Disney+ subscribers along with more than 50 million subscribers for its Hulu service. But streaming has been a big source of losses over the past few years, so the company is going all-out to boost profitability. The streaming business turned a small operating profit in the latest quarter, a positive swing of over $600 million from the prior-year period.

In the film segment, Disney is now putting quality over quantity. The company has been churning out too much mediocre content that has diluted its brand. Now, it will release at most three Marvel movies each year, as it looks to rebuild the franchise around quality.

There are a lot of moving parts as Disney engineers a turnaround, and a high level of uncertainty is likely weighing on the stock. But the company’s world-class collection of media assets, along with its knack for leveraging those assets across its business, make it a compelling investment.

It’s tough to value Disney right now given that its earnings are depressed, but the price-to-sales ratio currently sits on the low end of the stock’s historical range. As the streaming business starts churning out profits and the film segment bounces back, Disney stock could be in for a major recovery.

Should you invest $1,000 in DigitalOcean right now?

Before you buy stock in DigitalOcean, consider this:

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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 has positions in and recommends 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



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