Digital Ocean Is Doing a Lot of Things Right

Digital Ocean (DOCN -1.85%) shares have nearly tripled since their initial public offering (IPO) earlier this year, and the stock got another boost after its third-quarter earnings report.

In this episode of "Beat and Raise," recorded on Nov. 4, Fool contributors Taylor Carmichael and Jason Hall break down the numbers in the Q3 report and discuss the company's growth prospects. 

Taylor Carmichael: Wonderful. Let's get to it then. DigitalOcean. Let me share the screen. I'm still learning the ins and outs of this.

Jason Hall: Just be sure to click on that present button. Got it?

Taylor Carmichael: Yeah.

Jason Hall: Beautiful.

Taylor Carmichael: The market is very happy today. The stock's up 11 percent. If you own it, you probably noticed that. It broke 100, which made me really happy. The stock has been huge. Oh God, what did I do?

Jason Hall: Let's see which way did you go?

Taylor Carmichael: [laughs] Oh, gosh.

Jason Hall: Go the other way, you're going the wrong way.

Taylor Carmichael: How do I?

Jason Hall: You just hit the escape button and it will take you out of it.

Taylor Carmichael: Oh my goodness.

Jason Hall: Then you can find it and click on it.

Taylor Carmichael: Sorry guys.

Jason Hall: It's all right.

Taylor Carmichael: There we go, we're going to try it again. I'm not going to click on any buttons this time.

Jason Hall: There we go. Its got a heck of a 12-month run for DigitalOcean stock price.

Taylor Carmichael: Up 139 percent. They've been a monster stock since their IPO. Another good day today, stock up 11 percent. Their Q3 revenue again they beat, and they raised, so they hit all three that we like to see on the show. A $111 million in Q3 up 37 percent. This is non-GAAP earnings per share $0.12 a share that beat, and the Outlook is $427 million, which is a raise for the year.

Jason Hall: For full year, right?

Taylor Carmichael: Yes the full year. What I really particularly liked about this, is it's not just that they are growing, but the rate is growing as well. I wish it went out more than it did, but it's going in the right direction. Revenue growth last quarter was 35 percent so 37 percent this quarter. You always like to see that escalating growth, that always makes me super happy. Net dollar retention, which is a Software as a Service, one of our favorite statistics, 116 percent. They're getting additional revenues from their existing subscribers.

Jason Hall: That revenue retention rate, dollar retention rate for anybody that's not familiar. Basically what that means is for every dollar a customer gave them last year, they're giving them $1.16 this year, so that's fantastic.

Taylor Carmichael: That's correct and their annual recurring revenues are up 36 percent. It's not going up 100 percent or 200 percent like some real high flyers, but it's very solid numbers and they're up, everything is up. The market was very happy with what they reported today. There was one tiny quibble that made me a little bit nervous. Their number of customers dropped a little bit. I did it again. They had 602,000 customers last quarter.

Jason Hall: We can go ahead and hop out of the screen share and talk through the last bit.

Taylor Carmichael: Now they have 598,000 customers this quarter. Basically 600,000 customers. They're still getting a little bit of churn. Now to remind folks what DigitalOcean, does, they're competing with the big 3. They're competing with Amazon, they're competing with Google, they're competing with Microsoft for being your cloud host service. But what they are doing this really incredible, gives them incredible opportunity is they're hitting the small business and the medium-sized business and basically the whole start-up crowd. Every small business is starting up. This is like the perfect host for them. They can give them very clear, like guidance, the cost structure which Amazon Web Services can't do or doesn't do.

Jason Hall: Because its a usage based model, and that's a little bit more of a challenging.

Taylor Carmichael: This is just a flat. I think it starts at five dollars a month and then they add additional things. They do have some churn with people that get on and then their business plans fall apart or whatever happens that causes a bit of churn. Is it really surprising if you think about start-ups and people just trying to get a business going. But it's really exciting when you think about the companies that do continue to grow, those numbers are going to be remarkably a lot bigger. As the companies get bigger, they're going to spend more and more on the platform.

Jason Hall: Its like we like to buy small-cap stocks, theirs finding small-cap customers for the long-term to let them become the next mega-cap companies.

Taylor Carmichael: To me, that's scary for Amazon and Google and Microsoft, because they've got the big enterprise customers now. But who's going to have the big enterprise customers of tomorrow? The new companies, the new blood coming in, they're going to be with DigitalOcean. Today was a great day for the stock, a great day for investors. Up 11 percent, nothing bad here.