DigitalOcean (DOCN 3.27%) has been in fine form on the stock market in 2025, and it looks like the cloud computing provider's bull run is here to stay following the release of its latest quarterly results that sent its shares soaring.
Shares of the company shot up nearly 10% following the release of its fourth-quarter 2024 results on Feb. 25. DigitalOcean, which provides on-demand cloud computing infrastructure to start-ups, developers, and small businesses, crushed Wall Street's earnings expectations by a big margin. Its revenue was also better than expected. Even better, its guidance was ahead of what analysts were looking for.
Let's look at the reasons why DigitalOcean's results were solid and check why this tech stock remains worth buying even now.
NYSE: DOCN
Key Data Points
AI demand is boosting DigitalOcean's growth
DigitalOcean finished 2024 with a 13% year-over-year increase in revenue to $781 million, while its adjusted earnings increased 21% from the prior year to $1.92 per share. The company is anticipating identical revenue growth in 2025, while its bottom-line performance could be flat at the midpoint of its guidance range.
The flat bottom-line performance that DigitalOcean is anticipating this year can be attributed to the capacity investments the company is making to fulfill the demand for its AI-related offerings. That's not surprising, as the demand for DigitalOcean's AI offerings has been so strong that the company ran out of capacity.
For example, DigitalOcean launched its AI infrastructure deployment platform, Droplets, in October last year. This platform allows developers to rent powerful graphics processing units (GPUs), such as Nvidia's H100, which they can use to train large language models (LLMs) to build and deploy AI applications. This service enables DigitalOcean customers to implement AI applications without having to invest in expensive hardware, which explains why the demand was robust last quarter.
As a result, DigitalOcean's Droplets platform "quickly ran out of capacity after launching at the beginning of Q4," and the company is now allocating more of its GPU capacity for this offering. DigitalOcean is building a new data center in Atlanta which is set to come online in the current quarter. It says that this facility will give it "incremental capacity for both AI and our core cloud offerings, but also gives us a lower cost facility and is part of our longer-term data center optimization strategy."
This is a smart strategy, as investments in AI infrastructure capacity should pave the way for impressive long-term growth at DigitalOcean. After all, the market for cloud-based AI services is expected to jump by more than 6x between 2023 and 2030, according to Fortune Business Insights. DigitalOcean itself points out that its total addressable market for both cloud infrastructure-as-a-service (IaaS) and platform-as-a-service (PaaS) could increase at an annual rate of 22% through 2028, hitting $251 billion at the end of the forecast period.
DigitalOcean's 2024 revenue suggests that it could be at the beginning of a massive growth curve. The good part is that the company is well on its way to making the most of this huge opportunity by adding new customers at a nice clip and also winning more business from existing customers. For instance, DigitalOcean's average revenue per user (ARPU) increased by an impressive 14% year over year in the previous quarter, up by eight percentage points when compared to the year-ago period.
What's more, the company witnessed a solid year-over-year jump of 37% in the number of customers with an annual revenue run rate of more than $100,000 on its solutions.
The strong adoption of DigitalOcean's offerings is likely to continue in the future as it shores up its AI infrastructure and attracts more customers, while also winning a bigger share of existing customers' wallets.
The stock has the potential to double
Though DigitalOcean's bottom-line growth is expected to remain flat in 2025, analysts are expecting the company to clock double-digit growth over the next couple of years.
DOCN EPS Estimates for Current Fiscal Year data by YCharts.
However, don't be surprised to see DigitalOcean outperforming analysts' expectations, thanks to the AI-specific opportunity that it is targeting and the jump in spending by customers on its cloud platform. But even if DigitalOcean's earnings jump to $2.60 per share after a couple of years, and it trades at 34 times earnings at that time, in line with the Nasdaq-100 index's earnings multiple (using the index as a proxy for tech stocks), its stock price could jump to $88. That would be just over double DigitalOcean's current stock price.
The fact that DigitalOcean is currently trading at just 22 times forward earnings means that investors are getting a great deal on this AI stock right now. They may want to consider buying it right away, before it soars higher in the long run.
