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Is DigitalOcean a Good Investment?

This newly public cloud company is trying to snatch up business from the big three but has yet to turn a profit so is DigitalOcean a buy?

DigitalOcean (NYSE: DOCN) is a cloud company that caters primarily to small and midsize businesses (SMB) and developers by offering simplified and transparently priced cloud products. A developer can be up and running in minutes using the company’s Droplets (virtual server), 1-click apps, and a variety of databases for as little as $5 a month. Compare that with Amazon’s Web Services which can require the use of a third-party pricing expert to calculate costs for its dizzying array of services and pricing structures. 

Like most newly public tech companies, DigitalOcean has yet to turn a profit but has seen significant growth in important metrics. It also faces competition not only from similarly sized companies but from the big three (Amazon, Alphabet, Microsoft), who not only have brand recognition and more time in the market but very deep pockets as well. We take a deep dive into the bulls and bears of the matter and ask is DigitalOcean a good buy right now?

The bull case for DigitalOcean

In a time when SPACs are all the rage, DigitalOcean went public with a traditional IPO in March of this year. The company specializes in providing cloud services to SMBs and startups and is gaining a lot of popularity via word of mouth with developers. Its Total Addressable Market (TAM) is projected to be worth over $115 billion by 2024 and it looks like DigitalOcean is on track to snatch up a nice portion of that sum. Already boasting a gross profit margin that exceeds 70%, the company is committed to raising that number further still to the low 80s. 

From the company’s Q1 2021 report, its Net Dollar Retention (NDR) rate went up 600 basis points year-over-year (YoY) and Average Revenue Per Customer (ARPU) increased 20% in the same time period. Additionally, adjusted gross profit was 79% of revenue while capital expenditures were down 43% demonstrating the company’s lean and mean operations. DigitalOcean boasts clientele like Samsung, Xerox, and Salesforce, and boosted its customer number by 7% YoY. 

It’s not difficult to see why clients will continue to sever ties with the big three for the personal attention and transparent pricing of DigitalOcean, not to mention better performance. The company also has over half a billion dollars in cash and equivalents and zero long-term debt. 

The bear case for DigitalOcean

The company not only faces competition from private small firms like CloudWays and DreamHost but behemoths like the big three. Who’s to prevent Amazon or Alphabet from launching a smaller cloud service to address DigitalOcean’s SMB market? And DigitalOcean’s simplified offerings make it easier for companies to just migrate to another provider with very little switch-over costs. Furthermore, the sector the company operates in is known for customer churn as companies are prone to failure more than established organizations served by the big three. 

So, is DigitalOcean a good investment?

Given the small risk profile, I would say yes. Also, given the company’s potential TAM, optimal business operations, and impressive growth along with important metrics, not to mention the fact that it’s on the cusp of being profitable, this stock buy seems like a no-brainer. 

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Quickfire round:

1. When was DigitalOcean founded and by whom?

2011 by Moisey & Ben Uretsky, Jeff Carr, Alec Hartman, and Mitch Wainer

2. Where is DigitalOcean headquartered?

New York, NY

3. Who is the CEO of DigitalOcean?

Yancey L. Spruill since July 2019