The big cloud giants are pouring unprecedented amounts of capital into artificial intelligence (AI) data centers, and megadeals like the reported $300 billion agreement between OpenAI and Oracle are adding fuel to the fire. While the largest players in the cloud computing industry are likely to scoop up the lion's share of cloud AI spending, there are real risks for investors.
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First and foremost, any deal with OpenAI carries the risk that the start-up won't be able to come up with the cash necessary to pay for all the AI infrastructure it has committed to purchasing. OpenAI needs its revenue to explode in the coming years, in addition to raising an enormous amount of new capital from investors. It won't take much going wrong for these deals to look like a fantasy in retrospect.
Second, there's a real possibility that the AI industry is in the middle of an enormous bubble. It's not that AI technology isn't useful. The issue is the amount of capital being thrown at AI infrastructure and AI start-ups without regard for returns on investment. Is there enough demand to make building $1 trillion of AI data centers over the next few years make sense? Who knows?
Instead of betting on the cloud behemoths, DigitalOcean (DOCN -3.74%) could be a lower-risk cloud AI play. The smaller cloud platform has been ratcheting up its AI efforts this year, and as a potential buyout target, there are multiple ways for investors to win.
Building out its AI platform
Under CEO Paddy Srinivasan, who took the helm in early 2024, DigitalOcean has accelerated its efforts to expand into AI services. The company got into the AI business with the 2023 acquisition of Paperspace, but it's taken time for its AI offerings to materialize.
While DigitalOcean has offered virtual servers with AI-ready GPUs for a while, it took until earlier this year for the company to build the kind of platform on top of those core AI offerings that meshes with its mission to simplify cloud computing for its customers. The Gradient platform, which was introduced in July, combined AI infrastructure and an array of tools and applications that allow customers to train, fine-tune, deploy, scale, and manage AI workloads.
For those not wanting to manage infrastructure, the platform includes access to a wide array of industry-leading AI models from Anthropic, DeepSeek, Mistral, and OpenAI with token-based pricing. Virtual servers with Nvidia or AMD GPUs are also available for customers looking to train or run their own AI models.
Layered on top are features that enable customers to define their own data sources for use with AI agents, measure agent response quality, and hook into DigitalOcean's serverless functions for fetching data, triggering workflows, or performing other tasks. DigitalOcean has been iterating quickly, launching image model support and auto-indexing of data sources earlier this month.
A reasonable price and a buyout target
DigitalOcean stock has surged over the past few months, but it remains below its 52-week high and well below its all-time high. Based on the company's outlook for 2025, the stock trades for roughly 24 times free cash.
While DigitalOcean stock isn't a clear-cut bargain, the company has the opportunity to accelerate its growth through its AI efforts. Revenue grew by 14% year over year in the second quarter, while revenue from customers spending at least $100,000 annually surged by 35%. For those larger customers already extensively using DigitalOcean's cloud platform, the company's AI platform should be appealing.
DigitalOcean is also a potential buyout target. A report surfaced in September that suggested Cloudflare was considering an acquisition, and the rumors reemerged earlier this month. While a deal may not materialize, DigitalOcean's base of more than 170,000 customers spending at least $50 monthly makes the company an attractive target.
DigitalOcean isn't big enough to participate in the AI frenzy engulfing the cloud computing industry, but that may not be a bad thing. The company's rapidly improving AI platform can win over its small business customers with simplicity while it largely sidesteps the capital-intensive risks the larger cloud platforms are taking. For investors looking for a solid cloud AI stock that may be less exposed to the AI bubble popping, DigitalOcean is a great choice.
