Many retail investors buy stocks with the hopes of picking the start-up company that turns into the next Amazon (AMZN +0.76%) or Microsoft (MSFT 3.93%). Although they are now mega-cap stocks, Amazon and Microsoft got their start as small-caps, and each managed to follow a growth trajectory that few other companies will likely be able to match.
DigitalOcean Holdings (DOCN 0.45%) has carved out a niche in the fast-growing cloud computing segment. Some investors are wondering if this tech stock can follow a similar growth trajectory to the mega-caps mentioned above and produce millionaires from just a $10,000 investment. Deciding if they might be right requires a closer look at the company and its business.
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DigitalOcean's growth potential
DigitalOcean competes in the cloud infrastructure sector, which is a core segment of both Amazon and Microsoft's operations. While that might cause some investors to dismiss DigitalOcean because it won't be able to compete with such tech giants in this sector, they should note that DigitalOcean targets a segment ignored by the mega-techs -- small- and medium-sized enterprises (SMEs).
Unlike the big two, DigitalOcean offers SMEs simple pricing plans. This focuses the business proposition for entrepreneurs who would like to benefit from the cloud but do not want to deal with Amazon's or Microsoft's more complicated offerings.
Moreover, DigitalOcean has formed a community of IT professionals to help it serve these smaller customers. SMEs often employ only one person for IT (if they support any IT jobs at all). Such working conditions may leave these professionals isolated. However, DigitalOcean's community can connect its clients to other IT professionals, a benefit that can serve as a critical lifeline when trying to resolve IT-related issues.
Additionally, small businesses comprise 99.7% of all businesses and 43% of high-tech employment in the U.S., according to the Small Business Administration. This represents a substantial market segment in both the U.S. and other countries that also have sizeable small business communities.
That may help explain why DigitalOcean has managed to attract nearly 600,000 clients in 185 countries with its simple pricing and community support structure. Since it has built 14 data centers worldwide, it has created both the presence and the client base needed to establish a significant presence in the cloud infrastructure business.
The financial profile
With a market cap of just over $8 billion, DigitalOcean's size could point to massive returns should it someday become valued at $1 trillion or more. A $1 trillion valuation is not out of the question. According to Grand View Research, the cloud infrastructure industry will reach $1.25 trillion by 2028, a 19% compound annual growth rate. Grand View valued the industry at $369 billion in 2021, and CEO Yancey Spruill told Barron's that the company's estimated total addressable market is about $100 billion, indicating that cloud computing for the little guy is a big deal.
DigitalOcean appears to be beating that growth rate. It reported $309 million in revenue in the first nine months of 2021, surging 34% compared with the first three quarters of 2020.
Also, since its IPO in March 2021, DigitalOcean stock has climbed by nearly 80%. Despite that, investors can buy at a relative discount as it has fallen by over 40% compared with its November high. The stock dropped amid a broad-based tech sell-off.
DOCN data by YCharts
Additionally, its price-to-sales (P/S) ratio, which now stands at 18, had become elevated when it exceeded 30 at the stock's peak. Still, its current sales multiple comes in only modestly higher than Microsoft's P/S ratio of 14, which at a $2.5 trillion market cap is probably finished turning small investors into millionaires.
Can DigitalOcean make small investors millionaires?
Although one cannot predict the future, DigitalOcean's size and growth prospects give it the potential to help investors retire as millionaires. Its current revenue comprises well under 1% of the market's current size, not counting its tremendous growth rate.
Moreover, DigitalOcean is a small fraction of Microsoft's size. If it can capture and maintain increasing portions of the massive cloud infrastructure market, DigitalOcean could make small investors wealthy over time.
