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Which Is A Better Investment: DigitalOcean Holdings vs Cloudflare

In the sea of cloud computing, these two companies have caught our eye, but which is a better investment: DigitalOcean or Cloudflare?

DigitalOcean Holdings (NYSE: DOCN) and Cloudflare (NYSE: NET) are two companies in the expansive world that belongs to cloud computing. But, whilst DigitalOcean is a cloud platform for developers, startups, and small and mid-sized businesses (SMBs), Cloudflare provides website security and content delivery services. 

With many cloud computing options out there we wondered which of these two exciting companies is the better investment: DigitalOcean Holdings or Cloudflare? 

DigitalOcean Holdings: the bull and bear case

DigitalOcean is a cloud computing platform company that is currently attracting some attention from investors as a potential buy right now. Delving into its financials, the company posted a very good Q2 report with revenue coming in above expectations at $103.8 million, a 35% increase year-over-year (YoY). This was primarily driven by the 25% increase in average revenue per customer, as well as the 9% increase in its total number of clients now at 602,000.

For Q3, DigitalOcean will hopefully bring in revenue of $106 to $109 million. Additionally, it has also updated its full-year outlook; revenue expectations now sit between $419 to $423 million. Currently, this company is growing rapidly and expectations are running high. 

DigitalOcean has also recently been the subject of a bullish recommendation from the Citron Research report calling it the ‘Shopify of Cloud Computing’. The report put DigitalOcean’s price target at $200. This, in particular, caused a 7% spike on the day that the report was released. 

The main points that Citron Research made were: 

  • Customers love the product.
  • Fast growth in the SMB market.
  • Passionate and dedicated developer network.
  • Once a large customer base is fully established it will be able to ease into cross-selling. 

On the flip side, DigitalOcean is not yet a profitable business. Its latest earnings per share (EPS) came in at -$0.02 and it is expected that the company will finish the year with a loss. However, expectations are that this cloud platform company will break even in 2022 and begin to make a profit moving forward. 

However, DigitalOcean may be a very exciting company in the world of cloud computing, but, it has to compete with huge players such as Amazon, Salesforce, and Google. But, with its prices remaining lower than its major competitors, DigitalOcean should be able to build up its market share as it grows. 

Cloudflare: the bull and bear case

Cloudflare is a very popular cloud computing stock that has huge amounts of potential. It gives clients with web infrastructure and website security that facilitate content delivery networks and DDoS mitigation services.

Cloudflare posted a very promising report for its Q2 earnings this year with revenue up 53% YoY to $152.4 million. Additionally, the company increased its total customers with a record addition of 140 large customers which now sits at 1,088. EPS also shows that the company is almost about to break even with a $0.02 loss, which was better than expected. 

Looking forward, the company expects revenue to increase around 45% for the next quarter and then 46% – 48% for the full year. 

Cloudflare has also launched Project Pangea, a project that aims to boost worldwide internet around the globe. Eligible communities will be set up with data centers to building infrastructure, creating a free and easy way for people to connect on the internet and boost communications in everything from economic development to education. This is a win-win situation as businesses grow in underserved communities, Cloudflare will be the ones they go to for their website content delivery and security needs. 

However, Cloudflare faces heavy competition from the likes of Fastly, Amazon, and Microsoft. The company is certainly growing and as such its share price is also likely to keep on growing. However, with the pandemic still in a situation of uncertainty, if the market were to have another serious wobble again, Cloudflare would likely suffer. 

So, which should I buy?

Cloudflare is the least risky of the two and is the better investment, it has been growing at a pace over the past year and it even has the foresight to lend a helping hand to underserved communities. With its continued large client growth and the potential for expansion into SMB’s from underdeveloped areas, Cloudflare has a very big runway for business growth in the long term. 

DigitalOcean Holdings is a bit riskier, although not by much. It is expected to break even shortly after Cloudflare does and it already has a good hold in the SMB market. It now needs to focus on establishing a larger customer base before it can diversify its selling strategy.

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