Cloud computing is one of the trendiest, most transformative technologies of the past two decades. Organizations can now provision infrastructure and software services through the internet, eliminating the need for costly on-site hardware. To that end, cloud computing has fundamentally changed the way many businesses operate, making them more agile and efficient.
Going forward, research company Gartner believes that cloud spend will climb to $917 billion annually by 2025, implying 103% growth from $451 billion in 2021. With that in mind, Cloudflare (NET -0.23%) and DigitalOcean (DOCN 0.95%) look like smart stocks to buy and hold.
Here's why.
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1. Cloudflare
Cloudflare is on a mission to make the internet faster. Its global network offers tremendous capacity, and its various data centers sit within 50 milliseconds of 95% of internet users worldwide, meaning it can move a lot of data very quickly. That infrastructure is a significant competitive advantage, and Cloudflare uses it to offer a range of cloud services that accelerate and secure corporate networks and applications.
To reinforce its edge, the company offers a free tier of service that has made its platform wildly popular -- Cloudflare's content delivery network powers 19% of the internet, more than every other cloud vendor combined. The company leverages that massive user base to try new products and collect data, and it leans on artificial intelligence to surface insights that accelerate and improve product development.
Not surprisingly, the company is growing like wildfire. Last year, Cloudflare increased its paying customer base by 26% to 140,000, and the average customer spent 25% more. In turn, revenue soared 52% to $656 million, and while the company is still unprofitable on a GAAP basis, it generated positive free cash flow of $8.6 million in the fourth quarter.
Going forward, Cloudflare has plenty of room to grow. Management puts its addressable market at $100 billion by 2024, and the company is an innovation machine. For instance, it recently added email security tools to its growing portfolio of zero-trust cybersecurity services, and the company is beta-testing a cloud storage service to support its application development platform.
In short, Cloudflare has already achieved a strong market presence, but shareholders have good reason to believe that trend will continue. That's why this high-growth tech stock is a buy.
2. DigitalOcean Holdings
DigitalOcean is democratizing cloud computing. It offers a growing number of infrastructure and platform services, including computer and networking solutions, managed databases, and software development tools. But the unifying theme is simplicity. Its platform enables clients to deploy cloud services in minutes, even if they lack robust IT support. That differentiates DigitalOcean from vendors like Amazon and Microsoft, both of which tailor their products to larger enterprises.
To reinforce its niche, DigitalOcean also provides 24/7 technical and customer support, and it has created an extensive library of developer tutorials and community-generated questions and answers. To that end, DigitalOcean is a lifeline for small businesses, allowing them to harness the power of the cloud to build and scale applications. That value proposition has generated strong demand.
Last year, the company grew its customer base by 6% to 609,000, and the average customer spent 16% more. In turn, revenue climbed 35% to $429 million, and the company generated positive free cash flow of $24 million, up from a loss of $58 million in the prior year. Better yet, shareholders have good reason to believe that momentum will continue or even accelerate.
DigitalOcean currently tailors its services to start-ups and other small businesses, but the company is adding new products and features at a good clip. For instance, it recently launched solutions for database migration, application development, and infrastructure monitoring. As its portfolio continues to evolve, DigitalOcean should scale alongside the small businesses on its platform, meaning its total addressable market (TAM) should continue to climb in the future.
On that note, management puts its TAM at $145 billion by 2025, and in light of its differentiated business model, this growth stock looks like a smart way to invest in cloud computing.
