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Digital Ocean Holdings (DOCN 1.89%) Compared to others, it may be a lesser-known name in the cloud computing field. microsoft and Amazonwhich is currently in its early stages of growth, is not surprising.
Founded in 2012, DigitalOcean is not a cloud service provider in the mold of its more prominent peers. The company, known for providing an on-demand cloud computing platform used by small businesses, developers and startups, has struggled over the past year as cloud spending has slumped. I did. This explains why DigitalOcean stock has risen only 15% over the past year, significantly below the share price growth rate. Nasdaq Composite The index rose 42%.
However, a closer look at the company’s outlook and its attractive valuation suggests it may actually accelerate in the future. Let’s see why this is so.
DigitalOcean faces challenges, but investors need to focus on the big picture
DigitalOcean released its fourth quarter 2023 earnings report on February 21st. For the year, the company’s revenue increased 20% year-over-year to $693 million, and adjusted earnings rose 75% to $1.59 per share. However, DigitalOcean’s fourth quarter results show that the company is struggling as customer spending is tight.
The company’s fourth-quarter sales were $181 million, up just 11% from the same period last year. Average revenue per user (ARPU) increased by just 6% year over year. Additionally, DigitalOcean’s 96% net dollar retention rate suggests that existing customers have reduced their spending on the company’s services. This metric was down from 112% in the same period last year.
Net dollar retention rate compares customer spending in the same period last year to spending by the same customer cohort at the end of the current period. Therefore, a reading of less than 100% indicates that spending has shrunk.
CEO Paddy Srinivasan said in the company’s latest earnings call that DigitalOcean, like many major platform providers, will face a difficult macro demand environment in 2024, with revenue growth slowing from historically high levels. “We survived this and started in 2024.” This explains why the company’s 2024 outlook shows a slowdown.
DigitalOcean expects revenue to be $765 million this year, an increase of just over 10% from 2023 levels. We expect earnings to reach $1.64 per share at the midpoint, which would be a significant decline in growth from the prior year. However, DigitalOcean’s management is focused on the long-term growth opportunities available in the markets it serves.
The company aims to capture a larger 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 restore customer spending and bring in new customers. Paperspace gives users access to graphics processing unit (GPU)-accelerated cloud infrastructure to train, test, and deploy AI/ML applications. DigitalOcean claims that Paperspace will give customers access to “AI and machine learning-centric cloud applications that leverage the power of their GPUs in ways that were previously available only to large enterprises.”
It’s worth noting that the AI-as-a-Service market is currently in its infancy, generating $11.3 billion in revenue last year, according to Grand View Research. Researchers predict that this market will generate as much as $105 billion in revenue by 2030. Therefore, investors can expect DigitalOcean to regain its momentum in the future. The good news is that analysts expect the company’s revenue growth to accelerate from 2025.
DOCN earnings forecast data for current year by YCharts
Stock prices may accelerate
It’s no surprise that once DigitalOcean’s growth starts to improve, the stock price takes a big hit, delivering healthy returns for investors in the long run. As seen in the previous graph, the analyst has raised his DigitalOcean revenue forecast for this year, with the top line in 2026 he expects to be close to $1 billion.
The company’s stock trades at 5.3 times sales, which looks attractive when compared to the revenue growth recorded to date.
DOCN Revenue (TTM) Data by YCharts
If DigitalOcean’s growth actually accelerates, the market may reward it with a higher sales multiple. But even if the company trades at its current sales multiple and generates $1 billion in revenue in three years, its market cap could increase by 43% to $5 billion. That’s why investors looking to buy a cloud stock with the potential for healthy long-term returns may want to take a closer look at DigitalOcean before heading north.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Harsh Chauhan has no position in any stocks mentioned. The Motley Fool has positions in and recommends Amazon, DigitalOcean, and Microsoft. The Motley Fool recommends the following options: His long January 2026 $395 call on Microsoft and his short January 2026 $405 call on Microsoft. The Motley Fool has a disclosure policy.
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