DigitalOcean Fund (NYSE:DOCN) may not be a popular name in the cloud computing space compared to names like Microsoft And Amazonand this is not surprising as it is currently in its early stages of growth.
Founded in 2012, DigitalOcean is not a cloud service provider like its more illustrious peers. The company is known for providing an on-demand cloud computing platform used by small businesses, developers and startups, and it has struggled over the past year. due to low cloud spending. This explains why DigitalOcean stock has only gained 15% over the past year, which is well below the Nasdaq Composite the index’s gains of 42%.
However, on closer inspection, the company’s prospects and attractiveness assessment suggests he might indeed step on the gas in the future. Let’s see why this may be the case.
DigitalOcean faces challenges, but investors should focus on the bigger picture
DigitalOcean released its fourth quarter 2023 earnings report on February 21. The company’s annual revenue increased 20% year over year to $693 million, while adjusted earnings rose 75% to $1.59 per share. However, a review of DigitalOcean’s fourth-quarter results suggests the company is struggling due to tightening customer spending.
The company’s fourth-quarter revenue rose just 11% year over year to $181 million. Its average revenue per user (ARPU) only increased 6% from last year. Additionally, DigitalOcean’s net dollar retention rate of 96% suggests that existing customers have reduced their spending on its offerings. This metric was down from a reading of 112% in the year-ago quarter.
The net dollar retention rate compares its customers’ spending over the previous year to the spending of the same customer cohort at the end of the current period. So a figure below 100% suggests that spending has contracted.
CEO Paddy Srinivasan admitted during the company’s latest earnings conference call that DigitalOcean “enters 2024 having weathered a challenging macro demand environment where, like many large platform providers, revenue growth has slowed from historic highs.” This explains why the company’s outlook for 2024 points toward a slowdown.
DigitalOcean expects revenue of $765 million this year, which would represent an increase of just over 10% from 2023 levels. It expects profit to reach 1, $64 per share at the midpoint, which would represent a big drop in growth from last year. DigitalOcean’s management, however, is focused on the long-term growth opportunities available in the market it serves.
The company aims to capture a greater share of customers’ wallets by improving customer engagement and integrating new solutions such as artificial intelligence (AI) and machine learning (ML) into its cloud computing platform.
DigitalOcean’s acquisition of Paperspace last year could help the company revive customer spending and attract new customers to its fold. Paperspace gives users access to cloud infrastructure accelerated by graphics processing units (GPUs) so they can train, test, and deploy AI/ML applications. DigitalOcean says Paperspace will help its customers access “AI and machine learning-centric cloud applications that harness the power of GPUs in ways that have primarily only been available to large enterprises.”
It’s worth noting that the AI-as-a-service market is currently in its early stages and generated $11.3 billion in revenue last year, according to Grand View Research. The researcher expects this market to generate a colossal revenue of $105 billion by 2030. Investors can therefore expect DigitalOcean to regain its momentum in the future. What is positive is that analysts anticipate an acceleration in the company’s revenue growth from 2025 onwards.
DOCN Revenue Estimates for the Current Fiscal Year data by Y Charts
The title could step on the accelerator
Once DigitalOcean’s growth starts to improve, it won’t be surprising to see the stock receive a boost and deliver healthy gains for long-term investors. As the previous chart shows, analysts have increased their revenue expectations for DigitalOcean this year and expect its revenue to approach $1 billion in 2026.
The stock trades at 5.3 times sales, which looks attractive relative to the revenue growth it is seeing.
DOCN Revenue (TTM) data by Y Charts
The market could reward DigitalOcean with a higher sales multiple if its growth actually accelerates. But even if it trades at its current sales multiple after three years and generates $1 billion in revenue, the company’s market cap could reach $5 billion, a 43% jump. That’s why investors looking to buy a cloud stock that could generate healthy long-term gains may want to take a closer look at DigitalOcean before they start heading north.
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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. Hard Chauhan has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Amazon, DigitalOcean and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
1 Little-Known Cloud Computing Stock to Buy Hand Over Fist Before It Soars 43% was originally published by The Motley Fool
