Microsoft, AmazonAnd alphabet are very different companies, but they are the three largest players in the fast-growing cloud computing industry.
They offer hundreds of cloud services to companies, from simple data storage to complex software development tools. Recently, they have invested heavily in new data centers equipped with powerful graphics processing units (GPUs) from companies such as NVIDIAand they rent the computing power to artificial intelligence (AI) developers. This could be one of the most valuable opportunities in the history of the cloud industry.
Microsoft, Amazon and Alphabet are engaged in a bitter battle for market share in the AI field. DigitalOcean (NYSE: DOCN)has carved out a lucrative niche for itself by serving only small and medium-sized enterprises (SMBs) that are often overlooked by its trillion-dollar competitors. DigitalOcean stock appears to offer good value for money, and here’s why investors might want to buy it now.
Democratizing access to AI infrastructure
The leading cloud providers tend to focus on serving large enterprises as they have the highest budgets, while SMBs receive less attention. DigitalOcean targets these customers exclusively, whether they are in the startup phase or employ up to 500 employees.
DigitalOcean offers them a highly personalized service, clear and transparent pricing, and easy-to-deploy cloud tools, knowing that most of its customers cannot afford in-house technical teams.
DigitalOcean is now using this blueprint to offer affordable AI solutions to its customers. Currently, leading cloud providers give their largest customers access to tens of thousands of GPUs of computing power, meaning developers with significant financial resources are building the most advanced AI models. Smaller companies simply can’t keep up.
DigitalOcean recently announced that it will allow its customers to access small quantities of AI GPUs (typically between one and eight), including Nvidia’s flagship H100, to integrate AI into their workflows at a scale that suits them. CEO Paddy Srinivasan says this fractional, on-demand access to GPUs is the first of its kind in the industry and helps democratize access to AI.
In early 2025, the company will also open a new state-of-the-art data center in Atlanta that will expand its AI computing capacity. It complements the capacity DigitalOcean acquired last year with the purchase of Paperspace, a specialist in providing AI data center infrastructure at affordable prices.
In fact, Paperspace is up to 70% cheaper than leading cloud providers like Microsoft Azure in terms of AI computing capacity because it offers per-second billing to reduce waste and doesn’t lock customers into contracts. It also has a leaner cost structure because it only offers a limited range of services and passes these savings on to the customer.
DigitalOcean’s revenue growth is accelerating again
DigitalOcean reported record revenue of $192.5 million in the second quarter of 2024 (ended June 30), up 13% from the same period last year, marking the second consecutive quarterly growth acceleration.
Just two years ago, the company was regularly growing its revenue by more than 30% per quarter, so overall growth has slowed significantly. One reason for this is that DigitalOcean is currently cutting costs to increase its profitability. In the second quarter, the company’s total operating expenses were $95 million, an 8.5% reduction from the same period last year.
This resulted in a net profit of $19.1 million, an increase of a whopping 2,777%.
The fact that DigitalOcean was able to accelerate its revenue growth while reducing costs and generating a healthy profit speaks volumes about the organic demand for the company’s cloud services.
Plus, there’s something investors should keep an eye on in the coming quarters. DigitalOcean said its revenue specifically attributed to AI grew an astonishing 200% year over year in the second quarter. The company didn’t disclose how much revenue it actually generated from its AI services (including Paperspace), so we can assume the growth came from a very low base number – but it still signals increasing demand.
Why it is worth buying DigitalOcean stock now
According to an estimate by Grand View Research, the cloud industry as a whole will be worth around $730 billion this year. The SMB segment alone could be worth $114 billion, according to DigitalOcean, but the company expects it to grow 23% annually going forward, compared to just 21.2% for the entire cloud industry.
DigitalOcean’s strategy to provide affordable AI infrastructure and services could add a new dimension to this opportunity, as the company taps into a brand new market that has not been adequately served by other providers. Global consulting firm PwC projects that AI will add $15.7 trillion to the global economy by 2030, making this by far the largest financial opportunity DigitalOcean has faced to date.
DigitalOcean’s stock is currently trading 75% below its all-time high reached during the tech hype of 2021. With a price-to-sales (P/S) ratio of around 30, it was overvalued at the time, but the company has steadily increased its sales since then, and its P/S ratio is now just 4.1.
That’s a discount of more than 50% compared to the average P/S ratio of 8.8 since the company’s IPO in 2021:
In short, DigitalOcean stock seems like a good value right now. Combine that with the company’s accelerating revenue growth, rising profitability, and tremendous opportunities in the cloud and AI industries, and investors could do well to start buying.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Anthony Di Pizio does not own any of the stocks mentioned. The Motley Fool owns and recommends Alphabet, Amazon, DigitalOcean, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
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