Artificial intelligence is taking the tech industry by storm. Demand for GPU-powered cloud services is soaring as many companies look to train and run advanced AI models. Plenty of options are available, including GPU instances on major cloud platforms like Amazon Web Services and offerings from myriad start-ups.
Until now, DigitalOcean (DOCN 3.30%) has been absent from this market. The company takes an approach to cloud computing that puts simplicity at the center, and it's resisted the urge to rush a solution that goes against that ethos. Training an AI model is not a simple thing to do, often requiring a complex software stack along with expertise.
Instead of building its own solution, DigitalOcean has turned to its acquisition playbook to layer on an easy-to-use AI computing service. The company announced on Thursday that it will acquire GPU-focused cloud provider Paperspace for $111 million.
Keeping it simple
Like DigitalOcean, Paperspace aims to make its core product extremely easy to use. Paperspace bills itself as "a powerful no-fuss environment that just works." Through Paperspace's platform, a developer can build a proof of concept, train and fine-tune AI models, and deploy those models to API endpoints.
At the core of Paperspace's service are GPU-powered virtual machines. The company offers a wide variety of options that span the full gamut of price points, including less powerful GPUs that are cheap to run and the latest H100 GPU from Nvidia for customers that need serious GPU firepower.
DigitalOcean could have built out its own GPU computing platform, but it would have risked falling further behind rivals. By acquiring Paperspace, the company will have a powerful and simple GPU computing platform to offer its customers this year, while the AI boom is still in its infancy.
This isn't the first time DigitalOcean has turned to acquisitions to add a simplicity-focused service to its platform. The company spent $350 million on managed cloud platform Cloudways in 2022, which expanded the number of fully managed cloud services on its platform. DigitalOcean also acquired backup provider SnapShooter earlier this year to offer easy and robust backup functionality that goes well beyond its existing backup services.
Accelerating growth
DigitalOcean doesn't expect the Paperspace acquisition to have a meaningful impact on its financial results for 2023. However, starting in 2024, the company sees this acquisition boosting its revenue growth. There will likely be significant cross-selling opportunities, as Paperspace claims to have 500,000 users on its platform. DigitalOcean will provide more details when it reports its second-quarter results on Aug. 3.
The GPU as a service market was valued at $2.31 billion in 2022, according to Zion Market Research, and it's expected to grow by nearly 30% annually through 2030 to $28.7 billion. While enterprises are naturally going to choose a big cloud platform like AWS or Microsoft Azure for their GPU computing needs, DigitalOcean can become the go-to for developers and small businesses that want to build and run AI models without battling excessive complexity.
While DigitalOcean is likely set to pay a high price relative to Paperspace's current revenue for this acquisition, the company can afford it. DigitalOcean generates a healthy amount of free cash flow -- the company anticipates converting as much as 22% of revenue into adjusted free cash flow this year. Based on the company's guidance, free cash flow should come to around $150 million in 2023. This provides the firepower to make all-cash acquisitions capable of accelerating growth without the need to take on additional debt.
Once the Paperspace deal closes, DigitalOcean will have a solid entry in the GPU computing market. As demand for training advanced AI models continues to explode, DigitalOcean should be able to accelerate its growth next year.
