The pendulum of power that swung toward skilled employees in recent years is quickly swinging back toward the tech companies they work for. Earlier this month, Facebook and Instagram's parent company, Meta Platforms, cut 11,000 jobs, and it's not the only tech business with heaps of exiting workers. Twitter cut 3,700 jobs or around half its workforce.
Tech industry layoffs aren't limited to social media businesses, either. Coinbase, a cryptocurrency exchange; Shopify, an e-commerce company; and Stripe, a payments processor; all said this year that they would reduce staff by 10% or more.
A tech business for troubled times
While the tech industry is getting hit from all sides, there's one tiny cloud service provider that isn't losing any ground. DigitalOcean (DOCN +2.45%) is a cloud service provider for individuals and small to medium-sized businesses. It hasn't announced any layoffs because its business is likely to see increasing demand in the weeks ahead.
NYSE: DOCN
Key Data Points
Thousands of developers are suddenly finding themselves cut off from their previous employers' pricey cloud service providers, like Amazon Web Services (AWS). Rather than just sit around waiting for someone to respond to the resumes they send out, many will develop their own applications for next to nothing on DigitalOcean.
The DigitalOcean platform allows individual developers and small teams to build and deploy applications for free. Of course, the company starts generating significant revenue if an application succeeds and begins drawing in traffic.
Despite significant revenue reductions from Russia and Ukraine, the company expects top-line growth above 30% this year. In 2023, management expects another 30% year-over-year revenue gain.
A well-run business
DigitalOcean looks like a particularly interesting business, because developers tend to stick around after their applications get popular. We know this because the number of customers spending at least $50 per month rocketed 50% higher year over year to 142,000 at the end of September.
Many of DigitalOcean's customers spend a lot more than $50 per month. The monthly average revenue reported per user reached $79 in the third quarter. That was 28% more than the average user spent a year earlier.
Running a cloud service that appeals to smaller do-it-yourselfers instead of large enterprises can be surprisingly profitable. The well-run company is already reporting positive net income according to generally accepted accounting principles (GAAP). After adjusting for stock-based compensation and other non-recurring expenses, the company reported a 26% operating margin in the third quarter.
Image source: Getty Images.
A good stock to buy now?
Right now, shares of DigitalOcean are trading at 41.6 times this year's adjusted earnings expectations, or less than 32 times 2023 earnings if we assume the company meets its 30% growth target. These multiples are far above average, but average companies don't grow nearly this quickly. Given the company's proven ability to maintain 30% annual growth, it's probably a bargain at recent prices.
Before you rush out to invest everything you have, though, it's important to understand that DigitalOcean still trades at a valuation that has a lot of expectations baked in. This means the stock could tank if anything unforeseen causes growth to decelerate over the next few years.
DigitalOcean looks like a great growth stock to buy right now, but investors want to make it a relatively small part of a well-diversified portfolio.
