Stagnant Growth Stock Drops by 71%: A Regretful Missed Opportunity to Purchase at a Discount in 2025
Rewritten Article:
DigitalOcean, with a market share of 3.74%, has been a dependable provider of cloud services to small and medium-sized businesses (SMBs) for quite some time. Now, it's taking things a step further by introducing an array of artificial intelligence (AI) offerings to these customers, offering them affordable access to this transformative technology.
The stock is currently trading at a 71% discount from its 2021 all-time high. Given its previous overvaluation and the impressive market size, this decrease in price, combined with DigitalOcean's significant addressable market, makes for an intriguing investment opportunity.
Looking back in the future, investors might regret not seizing the chance to purchase stocks at these lower prices. Let's explore why 2025 could be DigitalOcean's most successful year yet.
Empowering SMBs with AI
The cloud computing sector is dominated by big names like Amazon Web Services (AWS), Microsoft Azure, and Alphabet's Google Cloud. These giants provide AI services such as data center computing capacity and large language models (LLMs), supported by their enormous funding. However, they typically prioritize serving larger organizations with substantial budgets.
DigitalOcean is an exception, as it primarily targets start-ups and SMBs with under 500 employees. These lesser-served segments in the cloud and AI market continue to grow but fail to move the needle for the industry leaders.
DigitalOcean has built a welcoming environment for its SMB cloud customers by offering clear pricing, highly personalized service, and tools that are simple to deploy, making it an ideal choice for businesses on a tight budget. Now, it's applying the same approach to AI services. In 2024, DigitalOcean became one of the first platforms to offer fractional computing capacity, giving SMBs access to a fraction of Nvidia's leading data center graphics processors (GPUs).
While AWS and Azure cater to the more extensive end of the market with data center clusters of thousands of GPUs, DigitalOcean's fractional capacity means even the smallest businesses can profit from AI.
DigitalOcean reported an over 200% year-over-year surge in AI-related annual recurring revenue in Q3 2024, which is a strong indication of demand. The company will release its fourth-quarter results in February, so investors should pay close attention for more updates.
The Highest-Spending Cohort is Growing the Fastest
DigitalOcean boasts over 638,000 customers, which it categorizes into three main groups: Learners, Builders, and Scalers.
- Learners: This group of 474,000 customers typically represents new businesses in their early stages, spending an average of $15 per month on cloud and AI services.
- Builders: Comprising 145,000 customers, this group is in the growth phase of their business lifecycle. They spend an average of $145 per month.
- Scalers: This is the smallest group with 18,000 customers, but they contribute the most to DigitalOcean's revenue. They spend an average of $2,153 per month and have graduated from the early stages of startup development.
Despite accounting for just 2.8% of DigitalOcean's total customer base, the Scalers cohort generates 58% of the company's revenue. Plus, their annual recurring revenue grew 19% year over year in Q3 2024, a higher growth rate than the other two customer groups.
Seeing its most substantial revenue contributors growing at a rapid pace is a positive sign, as it ensures sustainability and profitability for the company.
According to DigitalOcean's predictions, the company's total revenue for 2024 will hit a record $776 million. This would represent a modest 12% increase from 2023, stemming from careful cost management strategies to boost the company's profitability.
DigitalOcean reduced its total operating expenses by 4% during the first three quarters of 2024, resulting in net income of $66.2 million. This 19-fold increase compared to the previous year provides the company with more flexibility to invest in future growth.
DigitalOcean Stock is Currently Undervalued
DigitalOcean's stock was significantly overvalued and unprofitable when it reached its 2021 peak, with its price-to-sales (P/S) ratio soaring to 30. However, the 71% price decrease, coupled with the company's impressive growth trajectory, has pushed its P/S ratio down to a more reasonable 4.7.
This ratio is currently 43% lower than its lifetime average P/S ratio of 8.3, which dates back to when DigitalOcean first went public.
DigitalOcean's target market in cloud services for SMBs is estimated to be worth $114 billion in 2024, but the company believes this number could climb to $213 billion by 2027. This projection does not include AI services, which could generate substantial revenue for the company.
The S&P 500 stock market index is at record highs and is generally overvalued, making it challenging to find undervalued stocks. DigitalOcean's attractive valuation and growth potential make it an attractive investment for those seeking an alternative way to play the AI revolution.
In the context of DigitalOcean's strategic expansion into AI services, investing in its stocks could be a smart move for individuals interested in profiting from the rise of transformative technology in small and medium-sized businesses. With the company's affordability and personalized approach, it's an appealing option for investors looking for accessible AI investments.
Given the significant growth potential of DigitalOcean's most revenue-generating customer segment, the Scalers, who contribute 58% of the company's revenue and growth rate of 19% year over year in Q3 2024, it's clear that investing in this company could yield substantial returns in the future.
