By now, most people are familiar with cloud computing. If you own an Apple iPhone, you probably have access to iCloud, or you might be a user of Alphabet's Google Drive on another device. These are basic applications of cloud technology, which allows us to store our data online where it's easily accessible from anywhere, at any time.
But there's a much greater demand for cloud-based services in the corporate sector. The industry could be valued at more than $1.5 trillion annually by 2030, according to Grand View Research, with Amazon (AMZN +2.02%) and Microsoft (MSFT 0.60%) being the top two players right now.
But there's a much smaller provider called DigitalOcean (DOCN 13.28%), and it just crushed its bigger competitors for growth in the third quarter (ended Sept. 30). Its stock trades at a very attractive price right now, and here's why it might be worth buying.
NYSE: DOCN
Key Data Points
The DigitalOcean difference
Amazon Web Services and Microsoft Azure provide hundreds of cloud-based solutions to corporate customers, from simple storage to advanced machine learning tools, but much of what they do is tailored to large organizations. Given their size, it isn't cost-effective to provide highly personalized support to small businesses, and that leaves a gap in the market that DigitalOcean is happily filling.
The company focuses on providing cloud services to small to mid-sized enterprises, and this strategy brings many benefits. It can offer a much smaller portfolio of products and solutions than its larger competitors, which keeps costs down, and it can specialize in those specific areas. Plus, it can maintain more personalized relationships with customers, which tends to increase their stickiness.
For example, DigitalOcean's net retention rate hit an all-time high of 118% in Q3, meaning existing customers are spending about 18% more money in each passing year.
DigitalOcean also delivers some of the cheapest pricing in the industry. It has built a simple dashboard with a range of one-click tools making deployment quick and easy, eliminating the need for expensive technical staff.
Plus, the company is intently focused on educating its customers to help them get the most out of their cloud services through its online library containing thousands of items.
DigitalOcean outgrew the cloud segments of Amazon and Microsoft in Q3
Amazon and Microsoft both reported their financial results for the quarter ended Sept. 30. Over the last few years, the growth rate in their cloud services segments crushed the growth rate of their overall revenue, which points to the growing appetite among businesses for shifting their operations online.
In the recent quarter, revenue in Amazon's cloud segment grew by 27% year over year, and Microsoft's intelligent cloud segment grew by 20%. DigitalOcean's revenue, on the other hand, increased by a whopping 37%, which was its fastest pace this year and suggests it's actually snatching market share from its competitors.
DigitalOcean's average revenue per customer also soared by 27% to $79.22. The company had a record-high 142,000 users spending $50 or more each month, up 50% year over year, though that figure was boosted by DigitalOcean's recent acquisition of Cloudways, which contributed 20,000 customers to this spending category.
DigitalOcean has been flirting with profitability for a while on a net income basis, and in Q3, it managed to get there. It was in the black to the tune of $10 million, or $0.10 per share. This is a positive in the presently difficult economic environment because it reduces the risk of the company requiring a dilutive cash injection.
DigitalOcean stock is very attractive right now
Despite all the positives mentioned above, DigitalOcean stock has fallen by 78% from its all-time high, and it currently trades near its 52-week low point. The broader tech sell-off, which has sent the Nasdaq 100 index lower by 33% this year, is eroding investors' confidence in many high-growth companies -- Amazon and Microsoft included.
DigitalOcean stock now trades at a price-to-sales ratio of just 6.1, which is the lowest level since it became a public company.
But it's doing all the right things from an operational perspective, and that suggests this is an opportunity to buy a quality stock at a heavy discount. The long term could be even more exciting. DigitalOcean places its addressable opportunity at $72 billion this year, but it could double to $145 billion by 2025.
That's a compound annual growth rate of 27%, which is much higher than the 15% rate for the cloud industry overall. This suggests small to mid-sized businesses are a missed opportunity for DigitalOcean's much larger competitors.
It doesn't have to be a missed opportunity for investors, though.
