Thanks to the continuous migration of everyday life into the online world, the adoption of cloud services is rapidly growing -- whether individuals pay $0.99 per month to Apple (AAPL 0.74%) for iCloud storage, or their workplace spends thousands of dollars per month for more advanced tools and services.
Cloud computing began decades ago as an innovative way to store data, but the capabilities offered by leading cloud providers are constantly evolving, and new opportunities are forming across the industry. Those opportunities could be worth $483 billion in 2022, but are expected to triple to over $1.5 trillion annually by 2030.
With the Nasdaq 100 technology index in a bear market, investing in a fast-growing industry for the long run might be a great way to capitalize. DigitalOcean (DOCN 1.44%) is a niche cloud provider competing with the giants of the industry. Here's why it could be the best long-term investment in the sector.
Small but mighty
DigitalOcean is a $3.7 billion company, yet it's competing against behemoths like Amazon (AMZN 0.37%), which is worth over $1.2 trillion. The latter's cloud business, Amazon Web Services (AWS), generated over $60 billion in revenue last year alone. Microsoft (MSFT 0.88%) is another key cloud competitor of similar pedigree.
But DigitalOcean is excelling where the giants aren't: serving small to mid-sized businesses that have under 500 employees. These entities often fall through the cracks at larger providers, so DigitalOcean is attracting them with the lowest prices in the industry, great customer service, and a user-friendly platform that reduces the need for expensive tech employees.
The company offers month-to-month subscription plans for start-up businesses that range in price from $0 to $15, for a variety of needs ranging from basic data storage, building applications, and deploying virtual machines. DigitalOcean's bandwidth pricing undercuts the competition by a wide margin, starting at just $0.01 per gigabyte per month -- 80% cheaper than the next-best option.
The company had amassed over 623 thousand customers as of Q1 2022, and it's firing on all cylinders from a financial perspective.
Powerful financial growth
DigitalOcean reported its Q1 2022 earnings result on May 4, and it revealed year-over-year revenue growth of 36%. It's the fourth consecutive quarter of revenue growth exceeding 35%, and it's thanks to a growing cohort of over 102 thousand customers who spend over $50 per month.
In fact, the company's average revenue per user has hit an all-time high in at least eight consecutive quarters, accompanied by an all-time high revenue retention rate of 117%. That means that DigitalOcean's existing customers spent 17% more with the company than they did in the prior-year period, which is a great result considering it primarily serves small to mid-sized businesses.
It bodes well for the long term
DigitalOcean anticipates its addressable market opportunity will top $72 billion this year, which is a subset of the $483 billion number mentioned earlier that covers the entire cloud industry.
But the growth in DigitalOcean's opportunity is expected to run at a compound annual rate of 27%, compared to 15% for the rest of the sector. That would see the $72 billion figure grow to $145 billion annually by 2025. That means although the company is swimming in a smaller pool, it has the chance to grow faster than some of its larger competitors.
In the near term, DigitalOcean is set to cross the half-billion dollar level on revenue for the first time in 2022, and it's also set to deliver up to $0.71 in non-GAAP earnings per share (net income). If it meets that guidance, it would represent earnings growth of 108% compared to 2021.
DigitalOcean has captured a fraction of its opportunity so far, but it's rapidly expanding, and investors might want to consider an entry while its stock trades at a whopping 73% discount to its all-time high.