The public cloud infrastructure market is dominated by megaplatforms that have become the standard choice for enterprises and many developers. Amazon Web Services and Microsoft Azure lead the pack, and together they scoop up more than half of all spending.
But cloud computing is not a winner-take-all market. DigitalOcean (DOCN +2.89%), a tiny cloud computing provider in comparison to the cloud giants, is proving that there's room for more players as it consistently grows at a double-digit pace. There are a couple good reasons for investors to consider buying the stock, although there's also one issue that should give investors pause.
Buy: DigitalOcean keeps things simple
AWS and Azure offer just about every cloud service imaginable. They can support the largest enterprise customer and the most complex cloud workloads.
Where AWS and Azure fall far short is simplicity. Learnings curves are steep, products and services often overlap, pricing schemes are convoluted, and surprise bills aren't uncommon. All of that is fine for an enterprise customer with the resources to deal with complexity, but this complexity takes away from development time for small businesses and developers.
DigitalOcean does not offer anywhere near as many services, but that's the point. You can spin up a virtual server, run a managed database, store some data, and run serverless applications and functions. Along with a few odds and ends, that's essentially the whole platform.
Going from knowing nothing about the platform to running a real application on DigitalOcean takes a lot less time than doing the same on AWS. There's no question about which services you need to use, and DigitalOcean provides a wealth of tutorials, guides, and articles, along with free support. Pricing is straightforward and predictable, which certainly can't be said about AWS.
The big opportunity in the cloud computing market is not becoming the next AWS. At this point, no one is going to be able to out-Amazon Amazon. The big opportunity is removing layers of complexity and making cloud computing as simple as possible.
DigitalOcean estimates that its addressable market, which includes infrastructure and platform-as-a-service for developers and companies with fewer than 500 employees, will reach $72 billion this year. Of course, many potential customers will ultimately be persuaded by the vast set of features AWS and Azure provide. But many others will find DigitalOcean to be a breath of fresh air.
NYSE: DOCN
Key Data Points
Buy: Rock-bottom marketing costs
DigitalOcean's customers are small, and churn is naturally going to be fact of life. Average monthly spending per customer was just below $70 in the first quarter.
The company's sales and marketing strategies are aligned with this reality. Instead of spending heavily to acquire new customers, DigitalOcean uses a combination of word-of-mouth and content marketing to spread the word and attract new users.
Cloud computing isn't a winner-take-all market even within a single company. A big enterprise likely uses multiple public cloud providers, so if DigitalOcean can win over some developers at such a company, those developers can push for DigitalOcean within their own teams. This allows DigitalOcean to gain a foothold without needing expensive enterprise sales teams.
For winning smaller customers, DigitalOcean's vast library of content does much of the heavy lifting. After the recent acquisition of CSS-Tricks, more than 9 million unique users are visiting DigitalOcean's content each month. Not only does this produce new customers right away, but it also raises the brand awareness among developers who may not be familiar with DigitalOcean.
DigitalOcean spent just 15% of revenue on sales and marketing efforts in the first quarter, around half of what it spent on research and development. While the company isn't profitable yet, keeping spending lean will help improve the bottom line as revenue surges higher.
Sell: A ton of competition
DigitalOcean does not have a monopoly on simplicity. There are privately owned cloud computing providers that offer very similar platforms, including Linode and Vultr. There are platforms that drop the notion of servers entirely and allow developers to run applications without much fuss, such as Fly, Render, and Railway. And there are platforms built around serverless function, including Netlify and Vercel.
For developers looking for a quick and easy way to get an application up and running, there are a tremendous number of options. DigitalOcean's content marketing certainly gives it an advantage, but the company will be fighting for every new customer as it tries to convince developers that its platform is the best option in a sea of alternatives.
