What Happened?

Shares of cloud computing provider DigitalOcean (NYSE: DOCN) fell 6.1% in the morning session as markets continued to struggle following the broad selloff triggered by weak economic data in the previous week. On Friday, February 21, 2025, the S&P 500 dropped 1.7%, and the Nasdaq fell 2.2% after PMI numbers showed the U.S. services sector contracted, and the University of Michigan's consumer sentiment index came in below expectations.

Adding to Wall Street's anxiety, rumors swirled that Microsoft is trimming some data center projects, raising concerns that AI-related investments may get a little too bloated.

TD Cowen analyst Michael Elias flagged three key findings from his research. He noted that Microsoft "1) cancelled leases in the U.S. totaling 'a couple of hundred MWs' with at least two private data center operators, 2) has pulled back on the conversion of SOQ's to leases, and 3) has re-allocated a considerable portion of its international spend to the U.S."

Jefferies analysts see this as more of a regional spending adjustment, adding that Microsoft executives "strongly refute" any major shift in their data center strategy.

Investors' attention now turns to Nvidia's upcoming earnings report, a crucial barometer of AI infrastructure demand. The chip giant's Q4 2024 results and forward guidance will be closely scrutinized for signals on whether AI spending remains strong or is beginning to taper off. With so many moving pieces, investors are bracing for a volatile week ahead, while hoping for clarity.

The shares closed the day at $37.19, down 5.3% from previous close.

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What The Market Is Telling Us

DigitalOcean’s shares are very volatile and have had 20 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.

The biggest move we wrote about over the last year was 4 months ago when the stock dropped 16.1% on the news that the company reported weak third-quarter earnings results and provided underwhelming guidance with sales outlook for the next quarter roughly in line, while its EPS forecast missed. Also, sales came in roughly in line during the quarter, unexciting, and not enough for the market. Given the company's recent AI bets and potential in the SMB space, expectations were likely high, heading into earnings. However, the company provided some encouraging updates, announcing the early availability of its first GenAI Platform. Overall, this quarter was mixed, with the guidance weighing on shares.