Shares of DigitalOcean Holdings (DOCN 1.97%) rose by 18.8% Thursday. The stock market overall was volatile as it reacted to Russia's invasion of Ukraine, though the major indexes ultimately finished the day with gains. But the cloud computing platform provider surged higher thanks to a fantastic earnings update for the fourth quarter.
DigitalOcean reported revenue of $119.7 million for Q4, a 37% year-over-year increase. That came in above the top of the $117 million to $119 million guidance range that CEO Yancey Spruill and his team offered for Q4 at the time of the Q3 report. Annualized recurring revenue -- an important metric for cloud-based subscription businesses like this one -- also rose 37% in the quarter to $490 million.
Like many other fast-growing tech companies, DigitalOcean has been getting clobbered on Wall Street lately as the market adjusts valuations based on the expectation that next month, the Federal Reserve will begin hiking the benchmark fed funds rate from its current level near zero. The Fed hopes to put a damper on inflation with these rate increases and a gradual tightening of its loose-money fiscal policies, but higher interest rates reduce the present value of stocks -- especially for high-growth companies such as DigitalOcean, which is now down by more than 60% from its peak.
Nevertheless, DigitalOcean was due for a relief rally at some point, and its Q4 report is proving to be the catalyst. Adding to the cheer among shareholders was the fact that the business generated adjusted EBITDA of $37.8 million last quarter, good for a profit margin of 32% based on that metric. While this is a "growth first, profits later" type of company, DigitalOcean is acting prudently in its spending and ended 2021 with its free cash flow in positive territory.
DigitalOcean's cloud computing platform for start-ups and small and mid-sized businesses has accumulated lots of fans, and the company's financials indicate it's doing something right. Guidance from Spruill and his team is for at least another 34% increase in revenue in the current quarter, and at least 31% growth in 2022.
Though some investors worry that it could get crushed by big cloud platforms run by the likes of Amazon (AMZN -0.31%), Microsoft (MSFT 0.15%), and Alphabet (GOOGL 1.25%) (GOOG 1.13%), this scrappy cloud computing outfit is putting up solid numbers. Yet it trades at an expected-2022-sales-to-enterprise-value ratio of less than 8.
DigitalOcean is growing fast, and it's profitable, so give the stock a serious look if you're in the market for a long-term play on the cloud industry.