Companies can often be overly optimistic when estimating their total market opportunity. Beyond Meat's addressable market is not the $1.4 trillion global meat market, for example, no matter what the company says.
That's not the case for cloud computing companies DigitalOcean (DOCN 0.95%) and Cloudflare (NET -0.23%). Both compete in the enormous cloud infrastructure market, and while neither captures the full opportunity, DigitalOcean and Cloudflare are capable of growing at double-digit rates for many years to come. Here's a look at each.
1. DigitalOcean
The global cloud infrastructure market, which encompasses infrastructure-as-a-service (IaaS), platform-as-a-service (PaaS), and hosted private cloud services, churns up nearly $220 billion of revenue annually. What's more, this massive market is still growing at a healthy pace. Industry revenue shot up 24% year over year in the third quarter of 2022, according to data from Synergy Research.
Global information technology spending will hit $4.6 trillion this year, according to Gartner. As big as cloud computing is, it's clear that the industry's growth story is still in its early innings. The big cloud platforms like Amazon Web Services and Microsoft Azure will continue to rake in most of the industry's revenue, but there's plenty of room for smaller players to offer unique, differentiated services.
DigitalOcean is tiny compared to AWS. The developer-focused cloud platform generated just $576 million of revenue in 2022, less than 1% of the $80 billion of revenue produced by Amazon's cloud behemoth. But it's clear from the explosion of small cloud computing platforms that developers and smaller businesses are turned off by the complexity of AWS and its ilk. DigitalOcean is aiming to be the cloud of choice for anyone seeking simplicity.
While this strategy means that DigitalOcean isn't going to win many enterprise customers with advanced requirements, the company's long-term market opportunity is still immense. DigitalOcean estimates that global IaaS and PaaS spending among individuals and companies with fewer than 500 employees will reach $98.5 billion this year, growing to $194.6 billion in 2026.
This model works for DigitalOcean because the company has figured out how to acquire new customers on the cheap. It largely uses a self-serve model, with potential customers drawn in by a trove of helpful content and word of mouth. DigitalOcean spent just 14% of revenue on sales and marketing in 2022 thanks to its limited use of direct sales teams.
There will be many winners in the cloud infrastructure market as the cloud eats up an ever-growing portion of global IT spending. DigitalOcean looks likely to be one of them.
2. Cloudflare
Cloudflare is one of the best examples of a company with extreme optionality, and it's taken advantage by building out an expanding portfolio of products and services. The company started out focused on securing websites, but its platform also effectively improved performance by caching resources and removing suspect traffic.
Cloudflare's platform requires a global edge network, which enables a vast array of additional products. In 2018, when Cloudflare offered only its core security and content delivery services, the company's total addressable market stood at $32 billion. By 2024, the company expects its TAM to rise to $135 billion.
Those core services are still growing, but much of this expansion has been driven by newer products. Cloudflare's suite of Zero Trust Services, securing employee access to company resources, represents a massive opportunity in its own right. The global Zero Trust security market is expected to top $60 billion by 2027, according to Markets and Markets.
Outside of security, Cloudflare has built a full-fledged developer platform on top of its edge network. Customers can run code around the world, build websites, and leverage relational databases to construct full-stack applications.
The company singles out object storage as a key opportunity. Its R2 object storage product is inexpensive and shuns egress bandwidth fees entirely, giving customers an alternative to pricier options. The global object storage market is expected to hit nearly $14 billion by 2028, according to Emergen Research.
Cloudflare will undoubtedly find other ways to leverage its global network to provide additional value to its customers. With a huge market opportunity that could greatly expand in the coming years, Cloudflare is a stock worth considering.
