The Bull Case For DigitalOcean

In the wake of DigitalOcean Holdings, Inc.’s latest earnings call on August 5 of 2021, investors have more faith than ever in the American cloud infrastructure provider’s stock.

Based in New York but actively maintaining data centers all over the world, DigitalOcean (DOCN) provides developers with the cloud services they need to launch and sustain applications running simultaneously across multiple computers.

Since going public in March of 2021, the cloud company’s stock has only been trending upwards, leaving many quite bullish on DigitalOcean stock, but are they right?

As it turns out, thanks to some solid numbers for the company’s present and future as well as several positive developments to the DigitalOcean customer base, the bull case for DigitalOcean (DOCN) is more apparent than ever.

DigitalOcean Top Line Is Popping

Jumping right into the numbers, DigitalOcean’s financials for the second quarter of 2021 were impressively strong.

The company managed to bring in $103.8 million for the quarter, which represented a 35% increase in revenue for DigitalOcean.

Beyond this, DigitalOcean’s annual recurring revenue (ARR) went up to $426 million, which represents an increase of 36% year-over-year.

Both of these figures are incredibly positive for the company, and they bode well for bullish investors, as well.

In a year as difficult to predict as 2021, it’s a great sign to see DigitalOcean (DOCN) continuing to perform so well.

Beyond this, DigitalOcean also proudly boasts zero debt with over $579 million in cash, cash equivalents, and restricted cash.

These financials pair nicely with the company’s Net Dollar Retention Rate (NDR), which is 113% — an increase of 1,100 basis points compared to the second quarter of 2020.

This is all thanks to the company’s total number of customers, which rose to 602,000 (a 9% increase compared to Q2 of 2020).

Clearly, DigitalOcean’s financials alone are enough to justify a bullish argument. However, there’s a whole lot more to consider about DigitalOcean that will only strengthen the argument even more.

DOCN Forecast

DigitalOcean: the cloud infrastructure provider hasn’t stopped its steady upward climb in the five months or so since it made its NYSE debut.

Looking forward to future quarters, financial analysts see DigitalOcean stock rising to $68 per share over the next 12 months.

Based on a discounted cash flow analysis forecast, the fair market value for DOCN sits at about $65 per share.

How the Typical DigitalOcean Customer Is Changing

Impressively, DigitalOcean adds thousands of new customers a month. However, this influx of customers means that the typical DigitalOcean customer is almost constantly going through changes.

As of late, the company sees about 80% of its base as being in the early stages of their cloud infrastructure journey: they’re spending less, they’re testing things out, they’re figuring out how everything works. As such, they account for only 20% of DigitalOcean’s revenue.

That remaining 20% of DigitalOcean’s base consists of the big customers — the ones who know exactly what they’re doing and exactly how to do it, and, as a result, are willing to spend more to make it happen. This 20% accounts for the other 80% of DigitalOcean revenue.

While some would expect DigitalOcean to focus exclusively on that smaller fraction because they’re spending more, management still continues to focus on that larger fraction of smaller spenders because it knows that they’re the ones with the potential to become a big customer.

This represents a shift in the typical DigitalOcean customer: they’re not some enormous customer. They’re still small, they’re still figuring things out, and they’re still full of all sorts of potential.

DigitalOcean investors should love the fact that the company is trying to create titans out of the little guys instead of putting all its efforts into the big spenders, because it shows the firm’s focus on long-term.

DigitalOcean and Differentiation

In such a crowded field as cloud computing, differentiation is the key to success. The company prioritizes simplicity for the customer while also adding relevant and essential tools to help the customer grow over time, making DigitalOcean a highly sought-after company for those who are in the early stages of development — that 80% of the customer base discussed in the above section.

This attention to differentiation should only help make those bullish investors feel even more confident in their investment — it shows that DigitalOcean is dedicated to carving its own unique path to success.

DigitalOcean’s Pricing Strategy

Jumping off of this differentiation is DigitalOcean’s pricing strategy, which reflects the company’s dedication to simplicity at every step of the journey for its customers.

DigitalOcean believes that, regardless of skill level or price point, every customer deserves the same kind of support and commitment from the cloud infrastructure provider.

This wide range of offerings allows DigitalOcean to earn a premium with smaller customers and offer a discount to the larger players, and effectively helps both the company and the customer enjoy continued success going forward.

DigitalOcean’s Enhanced Offerings

As DigitalOcean’s customer base continues to grow, the higher-ups have noticed a growing subsection of customers that exist between the entry-level customers and the more experienced ones.

To meet their needs just as successfully as the company has done for the intermediate and experienced customers alike, DigitalOcean has begun investing in enhanced offerings to appeal to these customers that exist between newbie and expert.

This will only continue to grow the company’s customer base even larger, and will only result in even greater growth for DigitalOcean in the long run (which is music to bullish investors’ ears).

The Bottom Line: What Is the Bull Case for DigitalOcean?

While DigitalOcean Holdings, Inc. is relatively new on the New York Stock Exchange, there’s no denying that the cloud infrastructure provider has a bunch of factors that make it worthy of bullish investors’ attention.

From its impressive financials and promising forecast to its commitment to appealing to its ever-changing customer base, the bull case for DigitalOcean lies in its differentiation from the competition and its unique pricing strategy and offerings.

No matter the customer’s skill or experience level, DigitalOcean can help grow their cloud infrastructure (and, as a result, DigitalOcean can subsequently grow itself). 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.