What do Amazon, Microsoft, and Alphabet have in common? Cloud computing is one of the fastest-growing parts of each company.
Cloud technology is the reason many businesses are able to operate online. It allows them to serve a wider customer base and ultimately do significantly more with far less money. They no longer have to invest in expensive server hardware, because they can simply outsource it to a cloud provider who maintains large data centers off-premise.
According to one estimate by Grand View Research, the industry could be worth upwards of $1.5 trillion annually by 2030. While the above-mentioned tech giants rule the cloud right now, I want to introduce you to DigitalOcean (DOCN -0.90%), a small player growing at a rapid pace.
Here's why investors should consider buying its stock now.
Image source: Getty Images.
DigitalOcean is doing what its competitors won't
Microsoft and Alphabet are trillion-dollar companies, and Amazon was one prior to the recent tech wreck in the stock market. That's not easy for DigitalOcean to compete with, given its tiny valuation of just $2.5 billion as of this writing. It's outmanned and out-resourced, so it operates in one small corner of the cloud market that it says is overlooked by the industry giants.
It focuses on small to mid-sized businesses, including start-ups, that have under 500 employees. These enterprises need a higher level of attention and support compared to large organizations that have their own tech teams. DigitalOcean delivers a simple onboarding process and a user-friendly dashboard with a host of one-click tools to make deployment quick and easy.
It also offers cheap, transparent pricing because cost management is critical for its small, often budget-focused customers. And to help them get the most out of their cloud services, DigitalOcean provides an online library filled with thousands of items of educational material they can access at their convenience.
It isn't as lucrative for large providers like Amazon, Microsoft, and Alphabet to provide such an intimate level of service, because they earn most of their money from major enterprises.
Customers are flocking to DigitalOcean
DigitalOcean estimates its addressable market will include 100 million small to mid-sized businesses and 43 million developers worldwide by 2025. Since the company already serves customers in 185 countries, it's well positioned to tackle what could be a $145 billion financial opportunity by then.
Its core customer base, which includes businesses spending at least $50 per month, has almost doubled in the last two years alone. The latest third-quarter number was boosted by the recent acquisition of managed hosting provider Cloudways, which contributed 20,000 customers.
DigitalOcean's net dollar retention rate also hit an all-time high of 118% in the third quarter. It's an important number for investors to track, because it means existing customers are spending 18% more money than they did in the prior-year period, meaning DigitalOcean is consistently growing its relationship with customers.
This is further supported by the average monthly spend per customer, which now stands at a record high of $79.22.
Overall, these metrics translate to $641 million in annual recurring revenue, which is up 40% year over year.
But there's a long way to go, and that's good news for investors
As positive as all of the above-mentioned metrics are, DigitalOcean has still only tapped a fraction of its addressable market, so it has a long runway for growth. Considering its stock is down 80% from its all-time high amid the broader tech sell-off, this presents a unique opportunity for investors to buy in at a steep discount.
The company has aggressively invested in growth at the expense of profitability. Its strategy is to acquire as many customers as possible and then trim back its operating costs at a later date to deliver a positive net income (profit). That's a wise move considering its rising customer base and average spend per customer -- each customer acquired today should only grow more valuable over time.
But unfortunately, in this bearish stock market environment, investors have shied away from shares in companies that are reporting net losses, because they're perceived as risky. While DigitalOcean did generate a small profit of $10 million in third quarter, it lost over $14 million through the first three quarters of 2022.
Nonetheless, it's inching closer to becoming a profitable operation which could reignite its stock price in 2023, especially if the tech sector bounces back.
Investors who buy DigitalOcean stock now will own a slice of a company in a rapidly expanding industry at a much earlier stage of its growth story than competitors like Amazon, Microsoft, and Alphabet, leaving more room for potential upside.
