The cloud computing industry is dominated by trillion-dollar giants like Amazon, Microsoft, and Alphabet. Those companies also took the lead in the fast-growing market for artificial intelligence (AI) cloud services, renting state-of-the-art data center infrastructure to businesses who use it to develop and deploy AI software.
DigitalOcean (DOCN 7.62%) is also a cloud provider, except it specifically targets small and mid-sized businesses who need specialized and cost-efficient services that they can’t get with the larger platforms. The company also moved into the AI services space recently, providing its customers with affordable access to this revolutionary technology.
DigitalOcean is coming off an incredibly strong year in 2024, which featured record revenue and surging profits. However, despite a 29% gain in its stock price this year already, it still looks like a very good value. Investors can pick up a single share right now for under $50, and here’s why it might be a great idea.
Image source: Getty Images.
Delivering AI to small businesses
DigitalOcean’s customer base includes small- and mid-sized businesses in the start-up phase, right up to those with 500 employees. Since they usually don’t have big cloud budgets, they usually don’t have providers like Amazon and Microsoft focusing on meeting their specific needs. But DigitalOcean is winning these customers over by offering cheap and transparent pricing, highly personalized service, and simple tools that are ideal for companies that don’t have in-house technical staff.
DigitalOcean had 165,400 customers at the end of 2024, and they needed everything from simple data storage and website hosting services to complex software development tools. The company says around 80% of them would like to integrate AI into their operations, but 70% of them are concerned about the cost and their lack of expertise.
DigitalOcean has a growing portfolio of AI services to meet their needs, which includes data center infrastructure, access to leading third-party models like Meta Platforms‘ Llama family, and a generative AI platform that allows customers to seamlessly create their own AI agents without any programming experience. Those agents can be deployed as customer service chatbots on the business’s website, for example.
The company’s AI data center infrastructure is unique because it allows businesses to tap into between one and eight graphics processing units (GPUs) from leading suppliers like Nvidia so they can run even the smallest of AI workloads. Larger cloud providers often boast about their ability to deliver clusters of 100,000 GPUs at a time because they target customers with much deeper pockets who are trying to build the most advanced models.
As a result, DigitalOcean is quickly becoming a go-to destination for thousands of companies seeking to harness the power of AI. That’s why during the fourth quarter of 2024 (ended Dec. 31), the company’s annual recurring revenue (ARR) from its AI services soared by a whopping 160% compared to the year-ago period.
DigitalOcean’s profits surged during 2024
DigitalOcean generated a record $780.6 million in total revenue during 2024, which was a 12.6% increase compared to 2023. The company is growing more slowly than in previous years, primarily because of management’s decision to improve the bottom line by trimming costs.
DigitalOcean increased its spending slightly on line items like research and development and marketing last year, but its overall operating expenses declined by 2.7%. When less money is flowing out of the company while revenue continues to grow (even modestly) at the same time, it typically leads to a surge in profits.
As a result, DigitalOcean’s GAAP (generally accepted accounting principles) net income came in at $84.5 million for the year, which was a 335% jump compared to 2023. The company’s pivot toward growing its bottom line will create a more sustainable business for the long term. It will reduce the need for additional financing in the future, or capital raises that dilute existing shareholders and negatively impact their returns.
Profitability also gives management more flexibility to redirect money into initiatives like marketing and the development of new products in the future, which are key drivers of long-term growth.
DigitalOcean stock might be a great value
Despite its recent gains, DigitalOcean stock is still trading 68% below its all-time high, which was set during the tech frenzy in 2021. It was somewhat overvalued back then, with its price-to-sales (P/S) ratio climbing to almost 30. However, since the company has significantly grown its revenue in the four years since then, its P/S ratio has declined to a far more reasonable level of 5.1.
In fact, that’s a 16% discount to its three-year average P/S ratio of 6.1 (which excludes the elevated period from 2021):
DOCN PS Ratio data by YCharts
Based on DigitalOcean’s 2024 GAAP earnings per share of $0.89, its stock also trades at a price-to-earnings (P/E) ratio of 45.8. It appears expensive compared to the Nasdaq-100 technology index, which trades at a P/E ratio of 34.1, but that won’t be the case for long if DigitalOcean delivers another big year of growth at the bottom line in 2025.
DigitalOcean thinks its addressable market could be worth $138 billion this year, and it believes that figure could grow to $251 billion by 2028. Based on the company’s 2024 revenue, it hasn’t even scratched the surface of that opportunity.
As a result, this could be a great AI stock for investors to add to their portfolios for the long run.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. 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 has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, DigitalOcean, Meta Platforms, 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.
