Shares of DigitalOcean (DOCN 1.58%) experienced a sharp pullback in the past three months after a bright start to the year. The drop seems quite surprising considering the company delivered a couple of solid quarterly reports so far in 2025.
DigitalOcean provides on-demand, cloud-computing infrastructure to developers, small businesses, and start-ups, and the demand for the company's solutions has picked up impressively in recent quarters thanks to artificial intelligence (AI). The growing adoption of cloud-based AI services was a key reason why DigitalOcean crushed Wall Street's estimates in February. This was followed by another set of strong results for the first quarter of 2025, released on May 6.
Still, the cloud-computing stock trades down about 40% since hitting a 52-week high in mid-February. The good part is that this steep pullback in DigitalOcean's share price is an opportunity for savvy investors to buy a top growth stock at an attractive valuation.
Let's look at the reasons why this discounted stock is a no-brainer buy right now.
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DigitalOcean's growth is improving thanks to AI
DigitalOcean reported healthy revenue growth of 14% in Q1 as compared to the year-ago period. This was a 2-percentage-point improvement to the top-line growth it delivered in Q1 2024. The company's adjusted earnings increased at a faster pace of 30% year over year.
The company's management attributed the robust growth in its revenue and earnings to the rapid adoption of its AI services. DigitalOcean customers can rent powerful graphics processing units (GPUs) from the company to train and deploy AI models, perform AI inference tasks, and scale their AI projects as per their requirements. The company gives customers the flexibility to do all of this without having to invest in expensive hardware, such as GPUs that cost in the tens of thousands of dollars each.
Moreover, DigitalOcean customers save on the costs associated with managing the AI infrastructure. They can pay for the capacity they require and focus on building and deploying AI applications. Importantly, DigitalOcean has been adding more AI-focused services to its portfolio to capitalize on the adoption of this technology.
For instance, the company introduced its GenAI Platform in January 2025, offering customers "an all-in-one solution that empowers you to build and scale AI agents quickly." Backed by popular large language models (LLMs) from the likes of Anthropic, Meta Platforms, and Mistral AI, DigitalOcean saw terrific demand for its GenAI Platform.
The company points out that more than 5,000 customers use its GenAI Platform already and have built more than 8,000 AI agents. As a result, DigitalOcean's annual recurring revenue (ARR) from AI services increased by a whopping 160% year over year in Q1. The company's focus on pushing the envelope on the product-development front played a key role in driving this growth as it released 50 new features during the quarter, which was a 5x jump from the year-ago period.
Looking ahead, the demand for AI agents is expected to increase at an annual rate of 46% through 2030, while the adoption of cloud-based AI services is also expected to jump at a compound annual growth rate of 30% over the next eight years. Moreover, DigitalOcean believes that it has a total addressable market (TAM) worth a whopping $140 billion, which means that the possibility of further acceleration in its growth cannot be ruled out, considering that it has generated just over $800 million in revenue in the past year.
Its valuation means investors get a great deal on this stock
DigitalOcean's solid growth last quarter and its sunny prospects tell us that investors are getting a great deal on this AI stock right now, considering that it is trading at just 26 times earnings. The forward price-to-earnings (P/E) ratio of 15 looks even more attractive, as it points toward robust growth in its bottom line.
Investors, however, should note that DigitalOcean's earnings forecast of $1.85 to $1.95 per share for 2025 doesn't point toward any meaningful growth from 2024 levels of $1.92 per share. That's because the company ramped up capital expenses (capex) this year to shore up its AI infrastructure. DigitalOcean's capex was 31% of revenue in Q1 as compared to 24% of revenue in the year-ago period. The company's bottom line increased nicely despite that substantial increase.
This is a result of an increase in customer spending on its platform. DigitalOcean's average revenue per customer increased by 14% year over year. This figure could move higher thanks to DigitalOcean's focus on adding new AI services.
That's why it won't be surprising to see its earnings growing at a faster pace than its guidance in 2025 and pick up pace in the long run, which could lead to more stock-price upside. That's why investors looking to buy an AI stock that delivers a mix of both value and growth should consider DigitalOcean following its sharp decline this year.
