DigitalOcean: An Undervalued Cloud Play

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Investment Thesis

DigitalOcean (NYSE:DOCN) went nationalist backmost successful early 2021. The institution saw beardown traction initially pinch shares up complete 200% successful conscionable a fewer months. But arsenic nan marketplace starts to pullback later that year, it besides plummeted. It is now trading astir 80% beneath its all-time high.

The institution has a monolithic addressable marketplace and is benefiting from nan beardown tailwind of integer transformation. The latest net results proceed to show coagulated top-line maturation pinch nan bottommost statement being profitable arsenic well. After nan monolithic driblet successful stock price, nan company's valuation seems attractive. Its multiples are measurement beneath unreality peers pinch akin maturation rates. I judge a batch of negativity is already priced successful nan existent value levels should connection decent upside potential. Therefore I complaint nan institution arsenic a buy.

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Market Opportunity

DigitalOcean is simply a US-based exertion institution founded successful 2011. It provides unreality infrastructure solutions to mostly SMBs (small and mean businesses) and startups. The institution competes pinch nan likes of Azure (MSFT) and AWS (AMZN) but it is capable to triumph successful nan abstraction arsenic it offers overmuch little pricing and is little analyzable to usage compared to nan hyperscalers. For context, DigitalOcean's pricing tin beryllium over 40% cheaper compared to AWS. It is besides overmuch easier to group up and negociate which is simply a immense entreaty to beginners. The institution presently has complete 600,000 customers pinch 15 information centers globally.

The marketplace opportunity of unreality is massive. According to Grand View Research, nan world TAM (total addressable market) is forecasted to turn from $484 cardinal successful 2022 to $1.55 cardinal successful 2030, representing a beardown CAGR (compounded yearly maturation rate) of 15.7%. The company themselves estimates its TAM to turn from $72 cardinal to $145 cardinal successful 2025, representing an moreover higher CAGR of 27%.

The displacement to unreality is only successful its early innings and location are aggregate catalysts driving nan description . For example, streaming services person been increasing quickly pinch nan motorboat of Disney+ (DIS) and HBO Max (WBD) which vastly accrued nan request for unreality infrastructures. With nan ongoing take of IoT (internet of things), nan number of connected devices specified arsenic connected vehicles is besides increasing rapidly. Not to mention nan latest trending AI (artificial intelligence) technologies specified arsenic ChatGPT which require substantially much computing power. The wide acceleration of integer translator should proceed to beryllium a beardown tailwind.

DigitalOcean

Q4 Earnings

DigitalOcean conscionable announced its fourth-quarter earnings and it recorded yet different double beat. Top-line maturation continues to beryllium beardown while nan bottommost statement besides improved. The institution reported gross of $163 million, up 36% YoY (year complete year) compared to $119.7 million. ARR for nan 4th was $659 cardinal compared to $490 million, up 34% YoY. The maturation is driven by nan summation successful customers paying $50/month, which grew 45% from 99,000 to 144,000. The nett dollar retention complaint was 112%, down somewhat from 116%. Due to inflationary pressure, costs of gross was up 42.8% YoY from $44.4 cardinal to $63.4 million. This resulted successful nan gross profit separator dropping 200 ground points from 63% to 61%. Gross profit was up 32.3% YoY from $75.3 cardinal to $99.6 million.

The bottommost statement besides amended arsenic it continued to show operating leverage. Adjusted EBITDA was $51 cardinal compared to $37.8 million, up 34.9% YoY. Adjusted EBITDA separator of 31.3% was fundamentally level YoY compared to 31.6%. Non-GAAP operating income accrued 78.9% from $14.7 cardinal to $26.3 million. Non-GAAP operating separator besides accrued from 12.3% to 15.9%. It posted a free rate travel of $35.7 cardinal compared to conscionable $173,000. The free rate travel was 22%. Non-GAAP diluted nett income per stock was $0.28 compared to $0.11, up 155% YoY.

DigitalOcean

The institution besides initiated guidance for FY23. Revenue maturation was somewhat beneath statement which is benignant of expected owed to macro weakness, but guidance for nan bottommost statement came successful overmuch stronger than astir person expected. It guided gross to beryllium $700 to $720 cardinal which represents gross maturation of 23% astatine nan midpoint. Non-GAAP diluted nett income per stock of $1.65 to $1.69 translates to a whopping maturation of 77.7% astatine nan midpoint. Adjusted EBITDA separator of 38% to 39% and FCF separator of 21% to 22% is besides a further measurement up from nan existent year.

Investors Takeaway

I judge nan existent value presents a bully buying opportunity for DigitalOcean. The institution has a immense and expanding TAM which should proceed to substance maturation moving forward. Its debased pricing and easy-to-use strategy differentiate them from hyperscalers and pull SMB customers. The latest 4th is very beardown arsenic gross maturation remains robust contempt facing a reliable macro backdrop. Bottom statement continues to amended pinch income and rate travel up significantly. Guidance for gross maturation was soft but I don't mind it astatine each arsenic bottom-line metrics look really solid. After nan immense drop, nan institution is now trading astatine a PS ratio of 6.98x which is beautiful inexpensive fixed nan important growth. Cloud peers pinch akin maturation rates specified arsenic Datadog (DDOG) and CrowdStrike (CRWD) are trading astatine a PS ratio of 18.3x and 13.5x respectively, which correspond a important premium. Considering nan existent growth, profitability, and valuation, nan institution should beryllium trading astatine levels person to peers successful my opinion. This implies meaningful upside imaginable truthful I complaint nan institution arsenic a buy.

I americium a student presently studying sociology and economics astatine nan University of New South Wales. I conscionable started penning and I admit immoderate type of feedbacks and comments.