Passing on Digital Ocean, eXp World Holdings, and Columbia Bank

For the most part, I only like to highlight stocks that meet all of the stringent criteria to earn a "green dot" approval and a spot on our Watch List.

However, I think it can also be constructive, from time-to-time, to briefly discuss some Green Screen stocks that were reviewed and did not make the cut.

Two of the discarded stocks are not bad by any means, there are just a few things that give pause when considering an investment. We are looking for the "best of the best" opportunities, and they don't quite make the cut. Columbia Bank is nearing acquisition, so the upside in that stock is going to be limited.

Digital Ocean (DOCN)

Digital Ocean is not a bad option. This is a cloud computing infrastructure provider, not entirely unlike Amazon Web Services (AWS) or Microsoft Azure, but targeted at small-medium businesses (SMBs) and individual developers. Management sees a $145 billion opportunity for SMB cloud services by 2025 - if accurate, that's a VERY big market! Digital Ocean has been delivering over 35% revenue growth, it has recurring sales with net revenue retention at 118%, and free cash flow margins have been rising. There is a lot to like.

I'm passing for a few reasons. First, I'm not a terribly big fan of management so far. The firm has grown nicely under Yancey Spruill's guidance since 2019... but at a cost. There is a massive amount of debt - over $1.5 billion! The $350 million the company spent to purchase Cloudways in August seems unnecessary. If there is a $145 billion market, why does Digital Ocean need to make big acquisitions so early? Returns on invested capital have been mediocre at best. And finally, I just don't think there is the kind of stickiness with SMBs that there are for cloud providers in enterprise.

Investors could do a lot worse than Digital Ocean, but it doesn't hit all the spots to get a "green dot" stock nod.

eXp World Holdings (EXPI)

eXp World Holdings is another interesting company, but not quite a "green dot" stock. eXp is a "cloud" residential real estate brokerage that offers its agents far better benefits than traditional brokerages. All of its agents work from wherever using its Virbela platform. They earn an 80/20 split on the first $80k of commissions, and 100% of any commissions over that (vs. a traditional 70/30 split with no ceiling). They can buy company stock at 10% below market rates. No wonder agent count has tripled in just 3 years!

Growth is there too, with revenues increasing almost 5-fold since 2019. eXp is virtually debt free, generates excellent free cash flows, and is run by founder-CEO Glenn Sanford. The valuation on the stock is clearly too low, at a price-to-sales of just 0.4. There are some intriguing positives here, so why turn it down?

It really comes back to some of the characteristics of the business itself. Home sales obviously are not recurring revenues - most people move once every 7 years or so. Second, I don't see any durable moat advantages here. eXp's advantage right now is process based. Nothing is stopping traditional brokerages, or new copycats, from doing the same things to attract high performing agents. Competition is going to catch up to eXp pretty soon, and when it does, the company will likely have a hard time generating results like it has over the last few years.

Columbia Banking System (COLB)

Columbia Bank will soon be merging with Umpqua, which will shake up the business quite a bit. With the structure of the company and its financial statements in flux until the merger completes, I'm passing on taking a closer look at this time