Cloud computing has grown to become one of the most widely adopted technologies in the world. Almost every Fortune 500 company is using cloud services from one of the top providers, including Amazon or Microsoft, and its capabilities are constantly evolving.
The cloud allows organizations to shift their operations online, so teams can work collaboratively even on a remote basis, or from offices in different locations. It has revolutionized everything from data storage, data analysis, website hosting, e-commerce, and even the way advanced technology like artificial intelligence is developed.
DigitalOcean Holdings (DOCN 0.95%) is a cloud services provider with a special focus on small- to mid-size businesses, and it has carved out an edge in the industry that could see it grow faster than its enormous competitors.
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A booming segment of the market
The cloud services industry could be worth over $1.5 trillion annually by the end of this decade. It's a gold rush that can often leave the needs of small enterprises forgotten, while industry leaders chase after larger customers.
DigitalOcean primarily targets organizations with 500 employees or less, offering them competitive pricing, personalized service, and an easy-to-use platform that reduces the need for expensive technical staff in-house.
In the company's 2021 full-year earnings report DigitalOcean identified the value of its market opportunity serving small- to mid-sized businesses, which also highlighted the fact it's growing much faster than the cloud industry overall.
In 2022, DigitalOcean places its market opportunity at $72 billion, whereas the value of the total cloud industry could be as high as $483 billion. However, by 2025 DigitalOcean's market segment will have grown by 27% annually to $145 billion, compared to just 15.7% growth for the broader cloud industry.
Therefore, DigitalOcean could outgrow its competitors organically, simply by continuing to concentrate its efforts on smaller cloud customers with under 500 employees.
The path to success
To continue capturing an increased share of its target market, DigitalOcean will need to maintain a competitive edge on multiple fronts. So far, it's succeeding.
Right now, for example, the company's bandwidth pricing starts at $0.01 per gigabyte, per month, which is 80% cheaper than its closest competitor. And its subscription-based plans are ideal for start-ups whether they're building applications, managing databases, or deploying virtual machines because they start from just $0 to $15 per month.
To expand on an earlier point, DigitalOcean is focused on ease of use. It has built a host of one-click tools on its platform to make the deployment of virtual machines quick and easy, even with limited technical expertise. It also runs an online community containing thousands of tutorial videos covering the very basics of cloud computing, plus more advanced content like how to write code in different languages.
DigitalOcean has amassed a customer base of 609,000 businesses, 99,000 of which are spending over $50 per month. In fact, its monthly average revenue per user grew in every single quarter during 2021 and now sits at an all-time high of $65.87.
The company generated $429 million in revenue during the whole of 2021, and given its addressable market could be worth $72 billion this year, it has a long runway for growth. But the future looks even brighter, especially if DigitalOcean maintains its focus on providing cloud services to small and midsize businesses. If it does, it has a real shot at becoming a formidable player in the cloud industry and that makes the stock a great long-term bet.
