DigitalOcean Holdings Inc. (NYSE: DOCN)
DigitalOcean Holdings, Inc. is an American multinational technology company and cloud service provider. The company is headquartered in New York City, New York, USA, with 15 globally distributed data centres worldwide. DigitalOcean provides developers, startups, and SMBs with cloud infrastructure-as-a-service platforms. Having performed very well for itself recently, the company has seen an increase in mentions by 181% over the last day, prompting investors to wonder what makes the company gain so much hype, and if this is the cloud technology stock they should take a position in now. Shares of DigitalOcean Holdings currently trade at $34 per share.
Here are some of the factors that have contributed to the positive hype that DigitalOcean Holdings has generated.
As of December, just 2% of the company's customers accounted for 55% of its revenue. And just 21% of customers accounted for 85% of revenue. In other words, it wouldn't take many customers for DigitalOcean to hit its big revenue goal -- it's very attainable.
Through disciplined management, DigitalOcean's free-cash-flow margin is climbing higher. Its 13% margin in 2022 is expected to surpass 30% in the next few years. If it hits its goal, it would generate $300 million in free cash flow in 2025. This could be used to expand.
The company is FCF positive and posted a strong 22% margin in Q4 while only producing a 13% margin throughout 2022 -- showing its margins are improving. These are likely permanent gains, too, as DigitalOcean guided for a 21% to 22% FCF margin for all of 2023.
It also gave strong revenue guidance of 23% growth to $710 million. Despite its success, the stock is trading at 6 times sales, an extremely low price to pay for a young and growing tech company.
With DigitalOcean's 2022 revenue of $576 million, it's got a massive runway to grow. It expects to go from $576 million to $1 billion in revenue in 2025.
The International Data Corporation estimates the market opportunity for infrastructure as a service (IaaS) and platform as a service (PaaS) will grow at a 26% compound annual rate to reach a $195 billion market opportunity by 2026 for individuals and companies with fewer than 500 employees.
Although DigitalOcean might seem like a great investment, there are always risks that must be accounted for before making a call. Here is one of them.
DigitalOcean is still a young company and isn't profitable, which implies that it doesn’t have the proven track record to provide the extra cushion of security some investors might be looking for.
DigitalOcean is capturing a small corner of a vital market, and even though small and medium-sized businesses are unlikely to spend heavily on cloud computing in 2023, the long-term trends are in favour of this transition. That makes DigitalOcean an excellent stock to take a position in given its current prices.
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