Episode Details

DigitalOcean Holdings (DOCN) Q2 2026 — Q2 2026, quarter ended June 30, 2026. Revenue $281.2M, +28.6%, vs ~$279M consensus. Non-GAAP EPS $0.45 vs $0.26 expected - a 73% beat - but vs $0.59 a year ago. GAAP EPS $0.29. Pre-tax income $27.1M, -36%. Gross margin 55.0% from 59.9%. FY26 revenue guide RAISED to $1.170-1.180B (+30-31%); non-GAAP EPS guided $1.35-$1.40 vs $1.92 in 2025. DOCN opened $119.80 (-5.8%), closed $128.89, +1.35%. DigitalOcean beat adjusted EPS by 73% - 45 cents against 26 expected - and the stock still opened down 5.8%. That same 45 cents compares with 59 cents a year ago, so adjusted EPS FELL 24% while revenue grew 29%. And in the first half the company added $447M of lease-financed equipment against just $93M of cash capex. THE CALL: AVOID (4/5, A GENUINELY ACCELERATING BUSINESS AT A PRICE THAT REQUIRES A MIRACLE) — base-case value ~$55.0 vs ~$128.89 today. KEY METRICS: - CALL: AVOID 4/5, fair value ~$55 vs the $128.89 close - about 57% BELOW the price. Enterprise DCF on free cash flow after ALL capital spending, including lease-financed equipment, because a finance lease is a purchase. Base: 2027 revenue +40% to $1,645M, 38% EBITDA margin, all-in capex 35% of revenue falling to 18% by 2031; true FCF -$46M in 2027 rising to $578M in 2031. At 10/11/12%: bear $28/$24/$21, base $54/$45/$38, bull $104/$87/$74 - ALL NINE cells BELOW the price. Reverse-DCF: $128.89 needs ~$1.6B of true FCF in 2031, a 31% FCF margin on even our bull revenue - better than any hyperscaler earns. - THE BEAT IS REAL, AND SO IS THE DECLINE. Revenue $281.2M, +28.6%, vs ~$279M expected. Non-GAAP EPS $0.45 vs $0.26 consensus - a 73% beat, adjusted against adjusted. But the year-ago figure was $0.59, so adjusted EPS FELL 24% on +29% revenue. GAAP EPS $0.29 vs $0.39. Pre-tax income $27.1M vs $42.4M, -36%. GAAP net income fell only 4% because of an $8.3M tax BENEFIT against a $5.4M expense last year - a $13.7M swing unrelated to operations. - THE BAR WAS ON THE FLOOR, AND IT GOES LOWER. Consensus modelled $0.26 against $0.59 a year earlier - a 56% expected collapse. Now the guidance arithmetic: FY26 non-GAAP EPS guided $1.35-$1.40; H1 actual $0.89; Q3 guided $0.28-$0.30. Subtract and implied Q4 is ~$0.195 vs $0.44 in Q4 2025, down ~56% - in the very quarter revenue growth is guided past 35%. Full year vs $1.92 in 2025 is -27% to -30%. - $447M OF EQUIPMENT THAT NEVER TOUCHED CAPEX. Reported H1 'adjusted free cash flow' was +$62.8M (operating cash $156.9M less $81.6M property capex and $11.8M software). But finance lease and equipment financing obligations went from $130.5M at Dec 31 to $577.7M at Jun 30 - $447M in six months - while net PP&E grew $460M. A finance lease is a purchase financed with debt. Charge it honestly and H1 free cash flow is about -$384M, not +$63M. - $5.1B OF COMMITMENTS AGAINST $767M OF CASH, AND AN 11.2-YEAR DURATION MISMATCH. On balance sheet: debt $921M + finance leases $578M + operating leases $479M = $1.98B. Off balance sheet (10-Q Notes 7-9): $2,759M of data-centre leases NOT yet commenced, $282M servers, $128M software = $3.17B more. Those leases run a weighted-average 11.2 YEARS while management celebrates extending customer contract life from 1.6 to just over 3 years. Gross margin 55.0% vs 59.9%, -488bps, as D&A rose 56% to $51.2M. Shares: 91.9M (Dec 31) to 105.0M (Jun 30) to 117,579,550 (Jul 30 cover). What to watch: Changes our mind UP: finance-lease growth decelerating two straight quarters while revenue compounds, and gross margin stabilising. Confirms the bear: the implied ~$0.195 Q4 actually printing. We'd get interested at $60-$70. Also on YouTube: @ChargedAlpha DISCLAIMER: For informational and educational purposes only. Not financial advice. Do your own research before any investment decision.