Shares of cloud computing infrastructure provider DigitalOcean (DOCN 0.06%) have surged 44% so far in 2023 thanks to the consistently solid growth the company delivered despite a slowdown in cloud spending. Its latest results gave investors another reason to hold on to this high-flying cloud play.
Potential new investors who fear they may have missed DigitalOcean's impressive rally might still want to consider buying as the stock is not too expensive right now, and it is likely to deliver more gains. Let's look at the reasons why.
DigitalOcean's growth story is just getting started
DigitalOcean released its first-quarter results on May 9. Revenue jumped 30% year over year to $165 million, driven by a nice jump in the average revenue per user (ARPU) to $88.35 from $76.45 in the year-ago period. It was impressive to see an improvement in DigitalOcean's ARPU at a time when its customers are reportedly dialing back their spending due to macroeconomic headwinds.
DigitalOcean also recorded a 12% year-over-year increase in the customer base to 614,000. More importantly, it saw even faster growth in the number of its higher-spending customers. The company, which provides on-demand cloud computing infrastructure and tools to developers, start-ups, and small and medium-sized businesses, classifies its customer base into three categories: scalers, builders, and learners.
Learners are clients that have been using DigitalOcean's offerings for at least three months and spend less than $50 on its platform each month. Builders spend between $50 and $500 per month on the platform. Scalers are the company's most valuable customers, with monthly spending of more than $500.
The company saw heavy growth in the numbers of builders and scalers last quarter. The number of scalers increased 39% year over year and their ARPU stood at $1,962. The number of builders increased by 43% last quarter, with an ARPU of $135. It is worth noting that DigitalOcean finished Q1 with 15,000 scalers who generated $30 million in monthly revenue for the company. Meanwhile, the company was generating $18 million in monthly revenue last quarter from 131,000 testers and just $7 million in monthly revenue from 468,000 learners.
So, the company has a massive base of learners that could eventually move into higher spending categories as they ramp up their use of its products and solutions. It won't be surprising to see that happen as DigitalOcean's total addressable market is expected to clock annualized growth of 26% through 2026, jumping to $195 billion from this year's estimate of $98 billion.
As a result, DigitalOcean is expected to deliver solid top- and bottom-line growth over the next couple of years.
| 2023 | 2024 | 2025 | |
|---|---|---|---|
| Revenue estimate | $705 million | $832 million | $973 million |
| Revenue growth estimate (YOY) | 22% | 18% | 17% |
| EPS estimate | $1.69 | $2.17 | $2.60 |
| EPS growth estimate (YOY) | 80% | 28% | 20% |
Source: YCharts. YOY = year over year.
Why investors should consider buying the stock right now
According to analysts, DigitalOcean's rally is here to stay. The stock carries a Street-high price target of $63, which points toward a 71% jump from current levels. The good part is that DigitalOcean could indeed deliver such a solid upside considering the impressive pace at which its revenue and earnings are expected to grow.
As we saw in the chart above, DigitalOcean's revenue could hit $973 million at the end of 2025. The stock is currently trading at 5.8 times sales. While that is on the expensive side as compared to the S&P 500's average price-to-sales ratio of 2.4, DigitalOcean's richer multiple seems justified given the company's growth potential and its huge end-market opportunity.
If the stock maintains its current sales multiple after three years and delivers the projected revenue growth, its market cap could jump to $5.6 billion. That would be a 71% jump from its current market cap, suggesting that it could very well hit analysts' high-end price target. That's why investors looking to add a cloud stock to their portfolios right now would do well to buy DigitalOcean.
