Should I Buy DigitalOcean

Digital Ocean is an online cloud computing platform that provides tools to developers to be able to rapidly build, deploy and scale applications without having to worry about servers. So we take a look at Should I Buy Digital Ocean Stock?

About Digital Ocean Stock

DigitalOcean simplifies cloud computing so developers and businesses can spend more time creating software that changes the world. The group’s services are available worldwide.

DigitalOcean helps developers, startups and small and medium-sized businesses (SMBs) rapidly build, deploy and scale applications to accelerate innovation and increase productivity and agility. DigitalOcean combines the power of simplicity, community, open-source, and customer support so customers can spend less time managing their infrastructure and more time building innovative applications that drive business growth.

Digital Ocean IPO

The company set an IPO price of $47 on Wednesday 24th March 2021, the high end of its $44 to $47 pricing range, and raised more than $775 million through its public offering.

Its stock opened at $41.50, about 12 per cent below its IPO price. DigitalOcean is trading on the New York Stock Exchange under the ticker DOCN.

Digital Ocean Stock Price

The stock price of DOCN is up 25.11% in the past year to trade at today’s price of $53.17 per security. The stock has a 52-week range of $35.35 – $63.48 and currently sits about 15% off the 52-week high.

The company has a market capitalization of US$5.7 billion and generated US$318million of revenues in 2020.

Should I Buy DOCN Stock: Investor Sentiment

After surveying 217 Investors about their current NYSE:DOCN shares sentiment: BUY-HOLD-SELL, as well as their target price over the next 12-months here, are the results;

The above shows that community members of the private Prophet group are bullish on Digital Ocean Stock for the medium to long term.

DigitalOcean Stock Fundamentals

The group re-iterated in their Q2 2021 filing that they intend on maintaining a 30% revenue growth year on year for the short to medium term.

Historically the overwhelming majority of churn on the platform occurs in the first 90 days of a customer signing up to the platform. This is due to once a platform or droplet has been deployed onto DigitalOcean it becomes a very sticky platform for developers to get away from due to the quality of the offering, lack of substitutes and the amount of time and cost to migrate to a competing system.

DigitalOcean Fundamentals Revenue and ADJ EBITDA - Should I Buy Digital Ocean Stock
DigitalOcean Fundamentals Revenue and ADJ EBITDA

As entrepreneurs start on the platform they may start with a basic offering costing as little as say 6$ per month. However, as the entrepreneurs business increases and requires additional compute power and scale they can easily scale up the system to handle increased compute requirements. This results in increased spend per customer, which contributes to increased APRU.

Monthly Average Revenue Per User
Monthly Average Revenue Per User

Free cash flow is increasing in Digital Ocean Stock substantially, this is through a result of better optimization of their procurement, server fleet and capacity utilization. The company is free cash flow positive for the quarter, and DigitalOcean expects this to continue into the balance of the year.

The group had free cash flows of $40 million, which was up from the $20 million in Q1 and Capex of $26. The group have a debt to equity ratio of 0% meaning that they have no debt, with an equity value of US$858million dollars. equity is about 1/6th of the market cap.

Digital Ocean Stock Forecast

The group announced in their Q2 2021 report that they expect revenue to be in
the range of $106 million to $109 million, with an EBITDA margin of 30% to 31%.

For the full year, the company expects revenue to be in the range of $419 million to $423 million, with an adjusted EBITDA margin to be in the range of 30%-31%.

The group seems to have a good balance of geological revenue across the globe with contributions from North America, Europe and Asia having 38%, 29% and 23% of contributions towards revenues respectively. This shows a good mix of revenues between geological regions.

DOCN Revenue, COR, Gross Profit and EBITDA
DOCN Revenue, COR, Gross Profit and EBITDA

The above chart shows that DOCN is increasing revenues and EBITDA YoY since 2018. Revenue has increased by approximately 20-35% in the period. The group maintains their goal of achieving above a 20% growth rate for the short to medium term. Should DOCN Stock be able to fulfil this target we should see the company reach >$1 billion in revenue in the next 5-years.

Digital Ocean Stock Ownership and Insiders

DOCN Stock is controlled primarily by VC/PE firms with a 28.4% ownership stake, followed by Private Companies and the General Public at 24.1% and 17.3% respectively. Individual insiders own 13.9% of the company. We would have liked to see additional insider ownership, especially for a smaller fast-growing tech company.

The VC/PE firm ownership is high in our opinion.

Ownership Breakdown of Digital Ocean Shares.
Ownership Breakdown of Digital Ocean Shares.

The top 5 shareholders of Digital Ocean Stock are dominated by VC firms and Co-Founders Moisey Uretsky and Benya Uretsky. The CEO Yancey Spruill only hold about US$7.4 million of shares or 0.13% of the company. We would have liked to have seen the CEO holding significantly more stake in the company.

The American private equity giant Andreessen Horowitz has a significant track record of investing heavily in great opportunities. AH have invested recently in companies such as ABNB, UBER, LIFT, AFFIRM, COIN and HOOD to name a few.

Comparing this to Square stock for example has a very low count of VC/PE firms on the DOCN ownership table.

OwnershipNameSharesCurrent ValuePortfolio %
24.1%Access Industries, Inc.25,865,449$1.4bno data
14.59%Andreessen Horowitz LLC15,662,344$832.8m16.76%
13.8%IA Ventures14,808,964$787.4m100%
7.52%Moisey Uretsky8,073,078$429.2mno data
6.07%Benya Uretsky6,515,621$346.4mno data
DOCN Top 5 Shareholders

Should I Buy DOCN Stock: Dividend History

NYSE:DOCN does not currently pay a dividend.

We do not expect the company to be looking to pay a dividend in the near future, and typically of US-listed tech shares may instead focus on growing their ROE internally and giving back to shareholders by increasing the share price and potential buybacks in the future should cash flow allows.

NYSE:DOCN is very much in the growth phase of its lifecycle and can potentially offer shareholders a higher return on capital by not paying a dividend and re-investing in the company.

DOCN Competitive Analysis

Digital Ocean competes in a space dominate by industry incumbents such as Google Cloud Platform and Amazon Web services, however, there are also other smaller competitors out there such as VULTR and Linode. Neither VULTR nor Linode are listed public companies so we cannot do a simple comparison of the fundamentals.

Google Cloud the third largest cloud computing provider saw its revenue grow from $3 billion to US$4.63 billion for the three-month period that ended June 2021. This is a market that is growing incredibly fast in excess of 35% compared to the PCP.

Cloud computing has been a massive contributor for Amazon, Microsoft and Google in recent years and we expect the whole sector to continue to grow as the shift to digital continues. Google’s fastest-growing division from their FY2020 Annual report was their Cloud Platform with Google Cloud segment revenues of $4.1 billion or a 46% increase YoY.

DOCN Stock – Prophets Take

The online cloud computing sector should continue to grow as the shift to digital continues.

We really like Digital Ocean Shares at the current prices, in fact, we use DOCN to host our own website. It was the easiest, cheapest and most user-friendly option to set up. We really like the fact that as our business grows and our compute requires additional performance, scaling the servers is very straightforward.

As customers grow their own businesses and start repeating business with DOCN we should also start to see revenue and margin expansion. DOCN offers a multitude of tools available to online businesses to expand their online offerings and hence users will find it hard to find a ‘better’ offering at lower prices.

Digital Ocean stock has grown revenue year on year since 2018, also growing EBITDA and expanding GP along the way. As Google, Microsoft and Amazon continue generating significant growth through their own cloud platforms we should see the whole sector lift in value.

We are bullish on Digital Ocean Stock at the current prices. However, a key risk in our opinion is the high concentration of VP/PE firms on the ownership table. Depending on the objectives of the VE firm this may cause selling pressure on the share price as it rises, however, this is impossible to tell their motives.

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