Even the best growth companies go through rough patches. For DigitalOcean (DOCN +9.44%) and PubMatic (PUBM +4.88%), sluggish revenue growth has been a problem in recent years. The good news is that both companies are now on the up and up. DigitalOcean is leaning into artificial intelligence (AI) in a big way, and PubMatic is driving growth with connected TV and omnichannel video ads.
For investors looking for reasonably priced growth stocks with the potential to double, look no further than DigitalOcean and PubMatic.
A simpler cloud platform
Demand for AI infrastructure is soaring. An estimate from McKinsey puts the compounded annual growth rate of global demand for data center capacity between 19% and 27% through 2030. This growth will be largely driven by demand for running AI workloads.
NYSE: DOCN
Key Data Points
The biggest players in the cloud computing market are pouring mountains of cash into AI infrastructure. Microsoft, for example, is set to dump $80 billion into AI-enabled data centers this year, a staggering sum. Some of that spending will support Microsoft's own AI-enabled products, and some will support customers running AI workloads on its Azure cloud platform.
What remains true even in the age of AI is that the biggest cloud platforms are tailored to enterprise users with vast IT budgets, not small-time developers and small businesses. DigitalOcean has made a name for itself as a simpler alternative to Azure and Amazon Web Services (AWS), and it can now extend that distinction into the AI infrastructure market.
DigitalOcean acquired AI platform Paperspace in 2023, which put the company into the AI business. It rolled out virtual servers with graphics processing units (GPUs) last October, bringing AI compute capacity directly to its existing customers. The next step is the GenAI Platform, which is geared toward customers wanting to build and deploy AI agents without needing to manage infrastructure. DigitalOcean is putting simplicity first, enabling even those without any AI expertise to build and manage AI agents.
DigitalOcean is valued at less than $4 billion. The stock is reasonably priced relative to the bottom line, trading for about 23 times the average analyst estimate for 2024 earnings. AI could help the company accelerate its growth as it taps into an enormous market opportunity. DigitalOcean estimates its total addressable market will top $200 billion by 2027. Revenue for 2024 should come in somewhere around $775 million.
With a large market opportunity and the potential to accelerate growth with its GenAI Platform, DigitalOcean stock could be a big winner over the next few years.
An efficient adtech leader
Advertising can be a tough business, subject to booms and busts as advertising spending dries up or is shifted around. The pandemic triggered a downturn in global advertising spending, and while the industry has bounced back, ad spending growth is sensitive to economic conditions and various other factors.
NASDAQ: PUBM
Key Data Points
PubMatic specializes in helping digital publishers, content producers, and app developers monetize their content and applications. The company's programmatic digital advertising platform aims to maximize revenue for its clients. PubMatic operates at an enormous scale, processing 1.8 trillion advertiser bids each day.
PubMatic's growth slowed dramatically in 2023 due to a tough advertising environment, with revenue rising by just 4%. Business has picked up since then, with revenue growing by 13% year over year in the third quarter of 2024. Connected TV (CTV) is a big growth area, with CTV impressions more than doubling year over year in the quarter. And omnichannel video revenue grew by 25%, while mobile app revenue surged by more than 20%.
PubMatic owns and operates its own infrastructure instead of using a public cloud provider. So, as long as utilization rates are high, the company can efficiently process the enormous number of bids running through its platform. Through the first nine months of 2024, PubMatic recorded free cash flow of $26 million, down a bit from 2023 as the company ramps up capital spending. With a market capitalization of about $716 million, the stock trades for about 20 times the average analyst estimate from adjusted earnings per share.
As PubMatic shifts toward growth areas like CTV, the company can accelerate its revenue growth and ultimately drive earnings higher. As the adtech stock emerges from its downturn, it could be in for a major recovery.
