Cloud computing specialist DigitalOcean Holdings (DOCN -1.52%) released its third-quarter earnings report yesterday, beating analysts' estimates on the top and bottom lines. Revenue climbed 37% to $152 billion and non-GAAP (adjusted) earnings more than tripled to $0.38 per diluted share.
Unfortunately, fourth-quarter guidance fell below Wall Street's expectations, continuing a trend set by cloud giants Amazon and Microsoft two weeks earlier. But management's cautious outlook can be attributed to economic uncertainty, not a material problem with the business.
Here are four reasons this growth stock is worth buying right now.
1. DigitalOcean simplifies cloud computing for small businesses
Tech titans like Amazon Web Services and Microsoft Azure dominate the cloud computing industry. Both companies offer a broad range of infrastructure and platform services, spanning from basic compute and storage to sophisticated tools for machine learning and quantum computing. But those products are typically tailored to larger enterprises backed by robust IT support.
DigitalOcean engineered its platform with small- and medium-sized businesses (SMBs) in mind. Its interface features click-and-go options that simplify cloud computing, making it possible to provision services within minutes, without specialized training. DigitalOcean also provides round-the-clock support to all customers, and it has created an extensive learning library with thousands of developer tutorials. Those resources enable SMBs to easily build, deploy, and scale applications in the cloud.
This year, SMBs will spend more than $70 billion on cloud infrastructure and platform services, according to the International Data Corporation. However, that figure is expected to grow at 27% annually to reach $145 billion by 2025. DigitalOcean continued to outpace the industry average in the third quarter, meaning the company is gaining market share.
2. DigitalOcean is expanding its product portfolio
In 2019, DigitalOcean debuted managed database services. It started with managed PostgreSQL, but its offering has expanded to include other database platforms like MySQL and MongoDB. Databases are at the heart of every application, but they are complicated to build and maintain. DigitalOcean allows customers to offload that responsibility.
In 2020, DigitalOcean launched its App Platform, a managed service that enables SMBs to build, deploy, and scale applications without worrying about infrastructural nuances. With the App Platform, customers can offload the provisioning of servers and databases, allowing them to focus on application development.
In early 2022, DigitalOcean introduced its serverless platform. Serverless computing is a pay-as-you-go method of providing infrastructure services, meaning it goes one step further than managed hosting. DigitalOcean Functions not only eliminates the complexity of configuring servers, but it also eliminates the need to maintain idle servers. In other words, customers pay for resources only when servers are actually running.
In the third quarter, DigitalOcean acquired Cloudways for $350 million in cash. Cloudways provides managed website hosting services to SMBs, especially SMBs using website-building tools from WordPress. That frees customers to focus on creating engaging websites without being concerned about the infrastructure required to run them.
Investors should expect DigitalOcean to keep innovating at a steady cadence. For instance, management plans to bring artificial intelligence services to the platform in the future.
3. DigitalOcean is gaining momentum with customers
DigitalOcean's simplified approach to cloud computing is resonating with customers across a variety of industries, from finance and education to gaming and media. In the third quarter, the company reported more than 142,000 customers spending over $50 per month, up 50% from the prior year. It also posted a record net retention rate of 118%, meaning the average customer spent 18% more over the past year.
Those metrics suggest that DigitalOcean is not only capable of growing its relationship with customers, but also that it provides mission-critical solutions. Even if growth decelerates in the coming quarters, DigitalOcean is clearly creating value for SMBs, and that should drive long-term growth.
4. DigitalOcean stock trades at a bargain price
In June, DigitalOcean set a medium-term financial target of $1 billion in revenue by 2024, which implies 33% growth on an annual basis. The company also expects its free-cash-flow margin to reach 20% by that time, up from 15% in the latest quarter, and management says revenue will still be growing at 30%-plus by 2024. That outlook should give investors confidence.
DigitalOcean has seen its share price plunge 77% during the bear market, reducing its market cap to $2.6 billion. The stock is currently at an all-time low, with shares trading at 5.8 times sales -- a bargain compared to the historical average of 12.8 times sales. That valuation looks cheap for a company that says it can grow revenue at 30% or more for the foreseeable future. That's why this growth stock is a screaming buy.
