Cloud computing provider DigitalOcean (DOCN -2.79%) is built for developers and small businesses. Most of the company's customers spend less than $50 each month, and all customers have access to 24/7 support and a wealth of resources. Getting started is easy, pricing is simple, and the list of products is short to avoid overwhelming users with options.
This focus on smaller customers means that DigitalOcean can't spend too heavily on customer acquisition. A direct sales force makes sense if you're selling enterprise customers on long-term contracts worth many thousands of dollars annually. When your customer base is small and fickle, this approach just doesn't make much sense.
Investing in content
On top of word-of-mouth marketing fueled by satisfied customers, DigitalOcean pulls in potential users with a vast array of articles, tutorials, and guides. Instead of hiring expensive sales teams or dumping cash into pricey online ads, DigitalOcean has put in the work to build out a vast collection of helpful content.
Image source: Getty Images.
When DigitalOcean went public, its content was drawing in around 5 million unique visitors to its website each month. This traffic isn't entirely free; that content must be created and updated. But compared to buying search ads, this strategy is about as cost-effective as it gets. DigitalOcean spent just 15% of its revenue on sales and marketing in the first quarter, a small fraction of what's typical for fast-growing tech companies.
DigitalOcean supercharged this content strategy in the first quarter by acquiring CSS-Tricks, a website that features thousands of articles, videos, and guides focused on front-end development. CSS-Tricks will remain a stand-alone website, but it now prominently displays DigitalOcean branding.
With CSS-Tricks now part of the DigitalOcean family, the company recorded an average of 9 million unique website visitors during the first quarter, up 70% year over year. In a world where cloud computing is dominated by the major cloud giants, building up brand recognition is critical to DigitalOcean's long-term growth.
Acquiring websites with high-quality content may be a better use of capital for DigitalOcean than acquiring cloud computing companies. One of DigitalOcean's biggest strengths is the simplicity of its platform. The company could go out and expand its platform through acquisitions, but that would put that simplicity at risk. By increasing the number of visitors to its website, DigitalOcean can pitch its answer to the complexity of cloud computing to a greater number of potential customers.
A unique cloud computing investment
Shares of DigitalOcean took a beating on Thursday following its first-quarter report. The company's results were mixed relative to expectations, but revenue continued to grow swiftly, and full-year guidance was reiterated. With growth stocks in general being hammered, DigitalOcean hasn't been able to escape the tidal wave of selling.
DigitalOcean's market cap has fallen to $3.8 billion as I write this, about 6.7 times its guidance for full-year revenue. DigitalOcean isn't profitable, and it will be susceptible to any slowdown in the cloud computing market. But this is a company that is capable of growing at a double-digit rate for a very long time. DigitalOcean's total addressable market is expected to top $115 billion by 2024, and it serves a type of customer that just isn't a priority for the cloud giants.
DigitalOcean's beaten-down valuation would probably have been considered rich prior to the pandemic, so some caution is warranted. But DigitalOcean looks like a good way to bet on the growing cloud computing market, and there's likely more upside potential compared to the trillion-dollar cloud giants.
